Lawyer for business mergers, acquisitions, divestitures and other transactions.

BUSINESS PURCHASE: ASSETS vs SHARES

 Business Purchase  -  Letter of Intent  -  Due Diligence  -  Negotiations  -  Asset vs Share  -  Purchase Agreement  -  Closing

Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

When contemplating the acquisition of business, a critical factor is whether to structure the transaction as an asset purchase or a share purchase. This choice has significant legal, financial, and tax implications, and what is advantageous for the purchaser is often the opposite for the seller.

Asset Purchase (from the purchaser's perspective)

An asset purchase involves the purchaser buying specific, individual assets of a business (e.g., equipment, inventory, intellectual property, customer lists) rather than the shares of the company itself.

  • Advantages for the Purchaser:

    • Limited Liability: This is often the biggest advantage. The purchaser can be selective and only assume the liabilities they explicitly agree to take on. This allows the purchaser to avoid the seller's unknown or unforeseen liabilities, such as undisclosed tax debts, environmental issues, or pending litigation. The seller's corporation remains in existence and is responsible for all liabilities not assumed by the purchaser.

    • Tax Benefits (Step-Up): A purchaser can "step up" the cost base of the acquired assets to the purchase price. This allows the purchaser to claim new depreciation (Capital Cost Allowance or CCA) on the assets based on their fair market value, which can provide significant future tax deductions.

    • Selectivity of Assets: The purchaser has the flexibility to choose exactly which assets they want and to leave behind any unwanted or obsolete assets. Employee Selection: In most cases, the purchaser is not obligated to hire the seller's employees. The purchaser can choose which employees to offer new employment contracts to, which provides control over the workforce.

  • Disadvantages for the Purchaser:

    • Increased Complexity and Cost: An asset purchase is generally more complex and time-consuming. It requires the transfer of ownership for each individual asset, which can involve a significant amount of paperwork.

    • Third-Party Consents: Key contracts, licenses, and permits held by the seller may require the consent of third parties (e.g., landlords, suppliers, customers) to be assigned to the purchaser. This can cause delays or even prevent the transfer of critical agreements.

    • Loss of Goodwill and Tax Pools: The purchaser does not acquire the seller's goodwill, brand reputation, or any tax attributes like non-capital loss carryforwards.

Share Purchase (from the purchaser's perspective)

A share purchase involves the purchaser acquiring the shares of the company from its shareholders. The legal entity of the business remains the same, with its assets and liabilities staying within the corporation, but the ownership changes.

  • Advantages for the Purchaser:

    • Simplicity and Continuity: A share purchase is often a more straightforward transaction with less paperwork. Since the legal entity doesn't change, contracts, licenses, and permits generally remain in effect, avoiding the need for renegotiation or third-party consents (unless there is a specific "change of control" clause in a contract).

    • Acquisition of Tax Attributes: The purchaser can acquire the seller's tax pools, such as non-capital losses, which can be used to offset future income and provide a tax benefit.

    • Business Momentum: The business continues to operate seamlessly, with employees, contracts, and banking relationships generally staying in place. This provides a smoother transition and avoids potential disruption.

  • Disadvantages for the Purchaser:

    • Assumption of All Liabilities: This is the primary risk for a purchaser in a share deal. The purchaser inherits all of the company's liabilities - both known and unknown. This requires a much more thorough and extensive due diligence process to uncover any potential hidden risks, but some risks may be impossible to find.

    • No "Step-Up" in Asset Value: The purchaser does not get to adjust the cost base of the assets to the purchase price. The assets retain their historical cost for tax purposes, which may mean fewer opportunities for future depreciation deductions.

    • Employees and Employment Law: The purchaser inherits all employees and their existing employment terms and accrued years of service. If the purchaser wants to terminate an employee, they are responsible for providing notice or severance based on the employee's total years of service, including their time with the previous ownership.

For knowledgeable and experienced legal representation when purchasing a business, contact corporate business lawyer Christopher Neufeld at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.

 

Purpose of a Share Purchase Agreement. A Share Purchase Agreement is a legally binding contract that outlines the terms and conditions for the sale and transfer of shares in a corporation from its current shareholders (the Vendor) to the Purchaser. The functional purpose of a Share Purchase Agreement includes . . . Read more.

 

10 Key Aspects of an Asset Purchase Agreement. An Asset Purchase Agreement is the contractual document between the purchaser and the vendor that sets out the legal terms and conditions of the transaction of purchase and sale of specific assets of a corporation or business. The following represents 10 key aspects of consideration . . . Read more.

 

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