There are two different ways to acquire a business. You can either buy the shares of the corporation from the shareholders or buy the assets of the business. Tax, legal and business implications result from how you choose to structure the deal.
When you buy assets, you can buy all of them or pick and choose which assets you wish to acquire. If there is a piece of equipment you do not need or a lease you do not want to take on, you will not acquire them. If you buy shares on the other hand, you take on everything – all the assets and all the liabilities. These could be known or unknown. As there is greater certainty about liabilities when buying assets, there is less due diligence to do. You generally want to ensure that there are no liens or encumbrances against the assets you are buying and if a third party must consent to the assignment of the asset; you want to be sure that the consent is obtained. Often the documentation needed for an asset purchase transaction is less complex than a share purchase transaction.If there are employees involved, you must be aware that you are likely to become the successor employer regardless of the type of transaction. The Ontario Employment Standards Act protects the seniority of employees and with the purchase of a business you generally buy all of the severance obligations owing to employees.In Ontario, buyers of assets need to be aware of the Bulk Sales Act. All or substantially all of the tangible assets of a business cannot be sold without providing for how creditors will be paid.The structure chosen is often driven by tax advice so it is important to get such advice early.As a result of the implications outlined above, many buyers prefer to buy assets rather than shares. And may sellers prefer to sell shares. There’s a lot more to negotiate than the price.