Buying a Hamilton Small Business: Should You Choose an Asset Purchase or a Share Purchase?
Buying a small business can be a faster path to entrepreneurship than starting from scratch. The customer base, location, equipment, staff, brand, and revenue may already exist. But buying a business is also a major legal decision, which comes with many important choices. One of the first questions to consider is whether the deal will be structured as an asset purchase or a share purchase.
What’s the difference between an asset purchase and a share purchase?
In an asset purchase, the buyer purchases selected assets of the business. The assets may include things such as:
- Equipment,
- Inventory,
- customer lists,
- Contracts,
- Goodwill,
- intellectual property,
- Websites,
- Vehicles,
- leasehold improvements, and
- the right to use the business name.
Generally, the seller keeps the corporation or legal entity that previously operated the business, but that corporation no longer owns or runs the active business.
In a share purchase, the buyer purchases the shares of the corporation that owns and operates the business. The corporation continues to own its assets and remain party to its contracts, but ownership of the corporation changes.
Why does it matter which type of purchase I choose?
The choice matters because risk follows structure. In an asset purchase, a buyer can often choose which assets to acquire and which liabilities to leave behind, subject to certain contractual, tax, employment, statutory, and practical considerations. In a share purchase, the buyer generally acquires the corporation with its history, which may include tax issues, employee claims, lawsuits, debts, environmental concerns, contract breaches, unpaid suppliers, privacy problems, or other liabilities.
That does not mean asset purchases are always better for buyers or share purchases are always better for sellers. The right structure depends on a multitude of legal, tax, and other factors. For example, a share purchase may help preserve contracts that are difficult to assign, while an asset purchase may give a buyer more control over assumed liabilities.
How can I determine which type of purchase is best for me?
Obtaining both legal and tax advice is essential to help buyers determine the right structure.
Due diligence is critical in any purchase. Buyers should investigate things such as financial statements, corporate records, material contracts, leases, liens, litigation, employees, and intellectual property, among many others. If the purchase of the business depends on a key landlord, supplier, employee, or customer, those conditions should be understood before closing.
For example, commercial leases often determine whether the deal can proceed. A great business in a great location may lose value if the lease cannot be assigned, if there are no renewal rights, or if the premises require costly repairs. Buyers should review the lease before signing a purchase agreement.
The employees of the business also need careful attention. A buyer may want to keep existing staff, but each structure can have different legal consequences, depending on the employment terms that are offered.
What should I do when I’m ready to move forward?
A letter of intent can be useful, but buyers should be careful. Some letters of intent are mostly non-binding, while others contain binding terms about confidentiality, exclusivity, or non-refundable deposits. Signing a letter of intent too early without receiving proper advice can create legal obligations that buyers might not fully understand.
The purchase agreement should reflect the deal clearly. It should address factors such as the purchase price, assets or shares being purchased, any assumed liabilities, representations and warranties, conditions, due diligence, financing, landlord consent, non-competition or non-solicitation obligations, closing deliveries, indemnities, tax allocations, and post-closing assistance.
Buying an established business can be an exciting opportunity, but before buying it is critical to ask, “What exactly am I buying? What liabilities could come with it? Can key contracts and leases be transferred? Are employees being retained? Does the seller truly own the assets?”
If you are considering buying a small business in Hamilton or elsewhere in Ontario, contact Michael Ramsey at Ross & McBride LLP by phone or email. Michael can help structure the transaction, conduct due diligence, review leases and contracts, draft the purchase agreement, and guide you through closing.
