Purchasing a business can be done in two ways. You can purchase the assets of a business and you can purchase the shares of the corporation that owns the business.
Purchase of Assets
A purchaser normally prefers to purchase the assets of a business. This way, the purchaser can decide on the liabilities that it wants to purchase. The assets are normally all of the intangible property used to operate the business. For example, for a restaurant, the assets would involve all of the chairs, tables and equipment used to operate the restaurant, as well as the leasehold improvements and the goodwill of the business. The purchase price is allocated between the various assets that the purchaser is purchasing. The purchaser assumes only the liabilities that it needs to assume to operate the business once the transaction is complete (e.g., agreements and contracts for any leased equipment and suppliers).
If the vendor operates the business through a corporation, the vendor continues to own the corporation after the transaction is complete. The Purchaser takes over the business and can keep the existing name or can change the name of the business.
Purchase of Shares
A vendor normally prefers to sell the shares of a corporation that operates the business. The sale of shares offers a tax advantage to the vendor. The vendor can claim a capital tax exemption on the purchase price of the shares and can complete the transaction on a tax free basis. The capital tax exemption is currently set at $750,000. All vendors can claim up to the maximum amount and this amount can be shared between more than one transactions.
After the completion of the transaction, the purchaser owns the company that owns the business. The purchaser assumes all of the liabilities of the corporation and needs to ensure that it is aware of such liabilities prior to completing the transaction and that it has received applicable indemnifications from the vendor.
Consents Required for the Purchase and Assets or Shares
Consents from third parties or government entities are required whether you purchase the assets of a business or the shares of a corporation that owns the business. The consent of the landlord to the purchase or to the change of control, as required under the lease, is one of the most important consents.
A transaction cannot be completed without the landlord’s consent. It is therefore very important to ensure that the landlord is aware of the transaction and is willing to give its consent. Such consent should be a condition to any business transaction. If the landlord is not willing to approve the purchaser, the purchaser will not be in a position to waive the condition and will be able to walk away from the transaction and will be entitled to receive the deposit that it paid at the outset. Other consents that are mandatory are the consent of the franchisor if the business is a franchise store.
When purchasing a business or the shares of the corporation that owns the business, many documents must be signed and exchanged. The documents will depend on the type of transaction and the representations and warranties contained in the asset purchase agreement of share purchase agreement.
A purchaser should not complete a transaction without obtaining all of the required closing documents. Otherwise, the purchaser could be liable for the debts of the business that arose prior to the completion of the transaction or could have creditors of the business could have the sale declared void. This would leave a purchaser without a business to operate and with personal obligations under a lease.
If you are purchasing or selling a business, or would like to retain legal advice on how to proceed, please contact us.