Buying a Business: Share vs. Asset Purchase

By Mydene Cuevas

You’ve done your research. You’ve obtained advice from different business professionals.  You’ve entered into discussions with potential business partners. Now you feel ready to buy a business. Before you do, however, consider the implications of purchasing the shares or assets of the company. Generally, and for reasons given below, sellers prefer to sell shares of the company while buyers prefer to buy the assets*. In a sale of shares, the buyer effectively steps into the shoes of the seller, and inherits all of the assets and liabilities of the corporation.

Here are 4 things to consider when deciding whether an asset or share purchase is more appropriate for you:

1. Liability: the buyer in a share purchase transaction assumes all of the seller’s liabilities, including those which are unwanted or unknown. This is because all of the company’s assets and liabilities remain with the company. For this reason, share sales require higher levels of due diligence, as it may mean greater risks to the buyer.

In an asset sale, the buyer may generally pick and choose which assets and liabilities it wants to assume. Certain exemptions to this apply, however, and even in asset sales a purchaser will be liable for such things as environmental contamination. Always talk to a business lawyer before signing a purchase agreement or other documents that bind you to a contract.

2. Contracts: unlike in an asset purchase scenario, a buyer purchasing shares assumes all the contracts of the corporation. Beware, however, as the contracts signed by the corporation may have a clause that prohibits the assignment of the contract without the proper consent or approval of the other party to the contract; and an “assignment” is sometimes defined as a transfer of shares or control of the corporation. For example, in a commercial lease agreement, the contract may include a term that stipulates that the transfer of shares or control of the corporation constitutes an assignment of the lease, and any assignment must have the landlord’s prior written consent. In this case, if obtaining the leased premises is an important element to the buyer, it is imperative that prior written approval from the landlord is included in the condition precedent of the purchase agreement.

Another important term, among many others, in the purchase agreement is the buyer’s indemnification for any contractual breach or default that occurred prior to the closing date of the purchase transaction.

3. Employees: in an asset purchase, the buyer has the option of making an employment offer to whomever he or she chooses. However, in making employment offers, the buyer should be careful not to discriminate based on any of the prohibited grounds under the applicable human rights legislations. The buyer must also be aware that when the employment offer by the buyer has been accepted, the accepting employee’s employment is deemed to be continuous and uninterrupted by the sale. This means that the buyer must acknowledge the employee’s length of service with the seller for the purpose of identifying the employee’s rights under the employment standards of Alberta.

In a share purchase, the buyer assumes the employees of the seller, which means the buyer must consider the employee’s period of service when calculating the employee’s termination and severance entitlement.

Note that the employees in this Paragraph 3 are assumed to be non-unionized employees.

4. Lifetime Capital Gains Exemption (LCGE): this is a $750,000 gross deduction available throughout the taxpayer’s lifetime on the disposal of the shares of the qualified small business. If you are a business owner, talk to a qualified tax professional to see whether your business is a qualified small business corporation and whether you qualify for the LCGE.

Finding the appropriate structure of the sale is critical to a successful transition. Because of the many considerations involved in a purchase and sale transaction, involve a business lawyer at the outset to find the appropriate structure for you. If you are thinking of buying or selling a business, or would like to sign up for a free legal seminar geared toward business owners, contact Mydene Cuevas at mcuevas@milesdavison.com.

*Every business transaction is unique. Please contact a qualified professional (business lawyer and tax accountant) to obtain professional advice. The content in this article is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind

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Mydene Cuevas, JD

Mydene is a business, corporate and commercial lawyer with Miles Davison LLP. As a former small business owner, she is passionate about assisting business owners through the many legal aspects of owning and operating a business – from incorporation through to the sale of the business and everything in between. She may be reached at mcuevas@milesdavison.com or (403)298-0334.