What to Consider When Buying or Selling a Business in Ontario
When buying or selling a business, there are several items to consider, both financial and legal. Two of the most common methods of acquiring a business are by way of an asset purchase or a share purchase. It’s important to understand what property you will receive with each type of agreement because it differs greatly between the two.
A prospective business owner needs to conduct their due diligence with the help of a team of accountants and business lawyers. As a buyer, understanding the difference between the two methods of acquisition will help you make informed decisions during this research and negotiation phase. As a seller, knowing what you are handing over to a new owner and what you may be obligated to retain is also extremely important from a tax and legal prespective.
This type of agreement allows a new purchaser to pick and choose what they want to purchase from the seller. For example, a purchaser can take over inventory, equipment, supplier and distributor information, licences, and much more. This can also help new business owners avoid risk because they are not purchasing the corporation itself, just specific assets.
An asset purchase is typically the more desirable form of buying a business. However, it does come with risks. A purchaser must scrutinize every aspect of the business and ensure they acquire what is needed for it to continue operating. Sellers, on the other hand, are usually less keen to agree to an asset purchase agreement because it typically means they are unable to transfer any debt or obligations carried by the corporation.
A share purchase essentially means that all assets, including the corporation itself, is handed over to the purchaser. This type of agreement transfers all debt or other outstanding obligations to the buyer, as the new shareholders of the corporation. However, this does not mean that the purchaser’s hands are tied if there are unknown liabilities. Purchasers can, and in fact should, negotiate and require that any debt be paid off on or prior to closing.
Navigating a sale or purchase of a business is best guided by accountants and lawyers. Learn more about our business law services.