Introduction
Buying or selling a business is not just about the price. One of the first and most important decisions is how the transaction will be structured.
In most private business purchase / sale transactions, the deal is structured in one of two ways: a share purchase or an asset purchase. The choice between a share purchase or asset purchase has significant consequences for both the purchaser and vendor. It can affect risk allocation, tax treatment, the handling of employees, the status of third-party contracts, and the amount of work required to close the transaction.
Although every private business purchase / sale transaction must be individually assessed, purchasers and vendors often approach this assessment from different starting points. Purchasers commonly favour asset purchases, while vendors typically favour share sales, as each structure shifts the benefits and burdens in different ways.
Understanding Share Purchases
In a share purchase transaction, the purchaser acquires the shares of the corporation rather than individually purchasing the corporation’s assets. This means the corporation continues to own its business assets, remains party to its contracts, and maintains its status as the employer. By acquiring the shares of the corporation, the purchaser acquires and takes control of the corporation itself, with all of its underlying assets and liabilities, whether known or unknown at the time of closing.
Share sales may also be considered simpler in form because the subject of the sale is the shares themselves, as the corporation continues to hold its underlying assets. However, careful due diligence remains essential including, among others things, a thorough review of the corporation’s minute book, corporate records, financial records, material contracts, liabilities and title to key assets.
A share sale structure is often attractive to vendors. From the vendor’s perspective, a share sale allows the business to be sold without leaving the vendor with residual assets, obligations, or liabilities after closing. Tax considerations may also make a share sale more appealing to a vendor, although the outcome will depend on the facts of the transaction and should be reviewed with a professional tax advisor.
Understanding Asset Purchases
In an asset purchase transaction, the purchaser may select the individual assets being acquired and the liabilities being assumed. This structure is often attractive to purchasers, as it provides the purchaser with greater control over the scope of the transaction and may reduce the risk of inheriting unwanted obligations or unknown liabilities associated with the corporation.
However, the flexibility that an asset purchase provides also comes with added complexity. Since the assets are individually transferred, each category of property must be clearly identified and specifically dealt with in the purchase agreement between the parties. The purchase agreement must specifically address what is included, what is excluded, and which liabilities, if any, are being assumed.
Completing the transaction may also require additional registrations, consents, and notices. This may include consents from lenders, landlords, regulatory bodies, along with notices to employees, tenants, or others affected by the transaction.
Conclusion
Choosing between a share purchase and an asset purchase is not simply a legal formality. It is a strategic decision that shapes how the deal is structured before closing and the rights, obligations, and consequences that follow after closing.
If you are buying or selling a private business, careful planning at the outset can help avoid unnecessary complications and facilitate a smoother closing. The team at Inch Hammond works with clients to develop practical, tailored strategies that reflect their personal and business needs, helping to facilitate a successful transaction.
Share Purchase vs Asset Purchase – Which Is Right for You? We can help!
Disclaimer: The information in this article is for general informational purposes only and does not constitute legal advice. It is not intended to create a lawyer-client relationship. Please consult a qualified professional for advice on your specific situation.
