Business Acquisition Strategies: Shares vs. Assets

When considering acquiring a business, understanding the two primary methods of acquisition is essential. The approach you choose can significantly impact the financial and operational aspects of the business moving forward. Here, we explore the two main strategies: acquiring shares and acquiring assets.

Acquiring Shares

One method of acquiring a business is through purchasing its shares. This approach involves buying the existing ownership stakes from the current shareholders. Here are some key considerations and benefits of acquiring shares:

1. Retention of Business History: By acquiring shares, you inherit the business's history, including its relationships with customers, vendors, and credit history. This continuity can be beneficial if the business has a strong, positive reputation.

2. Capital Gains Tax: When you purchase shares for a certain amount (e.g., $1 million) and later sell them for a higher amount (e.g., $2 million), the difference is subject to capital gains tax. This can be a favorable tax situation compared to other forms of income.

However, there are also challenges:

• No Depreciation: Unlike asset acquisition, you cannot depreciate the purchase price of shares. The entire purchase price becomes the cost base, and tax benefits are realized only upon sale.
• Inherited Liabilities: Acquiring shares means taking on all historical liabilities, including past tax filings, debts, and any potential legal issues.

Acquiring Assets

The second method involves purchasing the assets of the business rather than the shares. This method allows the buyer to select specific assets and liabilities to acquire. Key benefits include:

1. Tax Depreciation: The purchase price of assets, such as equipment and goodwill, can often be depreciated, providing annual tax deductions. This can significantly reduce taxable income and enhance cash flow.

2. Clean Slate: When you acquire assets, you start fresh without the business's previous history. This means no inherited liabilities, debts, or legal issues, reducing the risk associated with the acquisition.

3. Reduced Due Diligence: Since you're not inheriting the company's history, due diligence focuses more on the value and condition of the assets, streamlining the acquisition process.

However, there are downsides:

• Negotiation Complexity: Sellers typically prefer to sell shares because of the tax benefits. As a buyer, you may need to negotiate to find a mutually beneficial agreement, often resulting in a hybrid deal.

Choosing between acquiring shares or assets depends on various factors, including tax implications, the business's history, and your long-term goals. Each method has its pros and cons, and understanding these can help you make a more informed decision.

Navigating the complexities of business acquisition requires expert advice. Our advisory team is here to help you understand the nuances of both acquisition methods and guide you through the process. Contact us today to ensure your business acquisition is strategically sound and tax-efficient.