Buying and Selling a Business – Legal Considerations by Murphy & Company
Buying or selling a business is an important step for an entrepreneur and should be carefully planned from both a financial and legal perspective. This article will highlight some of the considerations that owners (or future owners) face at the outset of such a transaction.
Business acquisitions are typically either for a company’s “shares” or its “assets”. Some of the differences between these two forms of purchase are discussed below. In either case, the parties may decide to start the process by entering into a “letter of intent” or “memorandum of understanding” in order to settle the basic terms, such as purchase price, exclusivity, deposit, confidentiality, etc. Often these types of agreement are non-binding in nature (apart from confidentiality, exclusivity and deposit conditions).
Once agreed, the terms of the letter of intent (if any) are subsequently reflected in, for a share sale, a “share purchase agreement”, or, for an asset sale, an “asset purchase agreement”. The purchase agreement is the primary document for the transaction and contains representations, warranties and other legal terms which have been negotiated between the parties (e.g. payment terms, allocation of purchase price (for asset sales), non-competition, post-closing consulting terms, etc.). There are often a number of ancillary documents entered into in connection with the purchase agreement in order to properly convey the relevant assets or shares.
Share purchases involve the purchase of all (or the majority) of the shares of a company that owns a business. In other words, the purchaser acquires the assets of a company through the purchase of its shares. If a company has more than one shareholder it is important to inquire as to the transferability of the relevant shares. Other shareholders may have the right of first refusal (e.g. in the articles of incorporation or shareholder agreement) or may be required to give consent before a sale can occur.
Due diligence is a crucial process in share purchase transactions. Typically, the purchaser focuses on topics such as whether (or to what extent):
- the vendor is the registered and beneficial owner of the shares;
- the shares are free and clear of any liens or encumbrances;
- there are any contracts to which the company is a party that will continue following the acquisition (subject to any change of control provisions); and
- there are any ongoing liabilities arising out of the business.
Tax issues are often the driving force behind the choice to structure a transaction as a share purchase or an asset purchase. For example, disposing of shares typically triggers the application of capital gains tax. However, in certain circumstances, shareholders may be entitled to take advantage of all or part of their lifetime capital gains exemption (currently $750,000) when disposing of their shares.
|PROS AND CONS OF A SHARE PURCHASE|
|No need to assign the business’ non-assignable contracts, permits and/or licenses or to obtain the consent of third parties, as these all remain in the name of the company (provided that there are no change of control provisions)||Purchaser has a restricted ability to select assets, and may end up acquiring both desirable and undesirable assets of the vendor|
|Purchaser acquires all of the assets, benefits and rights of the vendor||Purchaser acquires all the liabilities and debts of the company, even undisclosed or underestimated ones (e.g. back taxes, etc.)|
|Purchaser will acquire all the employees of the target company that are necessary to operate the business, without needing to make new offers of employment||Purchaser may acquires contracts which it does not wish to assume|
|If the purchaser does not want all the employees of the company, and the employees are not terminated prior to the sale, the purchaser may be liable for severance if they later choose to terminate any employees.|
Asset purchases involve the purchase of all, or part, of the assets of a business. In a typical asset purchase, the shares of the vendor do not form part of the transaction. Asset purchases are often preferred by buyers, as it provides them with flexibility to pick and choose which assets they wish to acquire and, to a much greater extent than in a share purchase, avoid assuming a company’s liabilities.
As with share purchases, due diligence forms an integral part of an asset-based transaction for a purchaser and typically includes issues such as whether (or to what extent):
- any other parties have a legal interest in the assets (e.g. creditors);
- the assets are in good condition;
- any contractual obligations exist which could affect the purchase; and
- the vendor has sufficient authority to sell the assets.
Employment issues can have a significant impact on a purchaser depending on the nature of the assets being purchased, their significance to employment and governing employment/labour legislation. For example, where the employees are part of a union, and a purchaser acquires all (or substantially all) of the assets of a business and continues operations without interruption after the transaction, they could be considered to be a ‘successor employer’ under British Columbia legislation and possibly be bound by any collective agreement between the vendor and the union representing the employees. In addition, under the Employment Standards Act (British Columbia), the employment of a worker is deemed to be continuous and uninterrupted by the sale of the business, provided that all (or substantially all) of the assets of the business are sold. This means that the purchaser could inherit the severance obligations of the vendor that have accrued during the course of a worker’s employment. Often this is dealt with by having the vendor provide notice of termination to all employees well in advance of the closing, following which the purchaser can make subsequent, post-closing, offers of employment to the workers that it wishes to hire.
|PROS AND CONS OF AN ASSET PURCHASE|
|Purchaser can hand-pick the assets and choose not to acquire unnecessary assets||Each asset will have to be transferred to the purchaser, which could be subject to additional transfer costs (such as realtor commissions, registrations fees, property transfer taxes, capital gains taxes, other taxes, etc.)|
|Purchaser does not automatically assume, and can choose not to acquire, undesirable contracts and liabilities||The purchase price must be allocated between each of the assets and the goodwill, and such allocation may have adverse tax consequences|
For more information on buying or selling a business, do not hesitate to contact Murphy & Company at (604) 360-7014 or by email at: firstname.lastname@example.org
This article is not legal advice and is not intended as legal advice. This article is intended to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic discussed. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. This article is based on British Columbia law. You should consult with an attorney familiar with the issues and the laws of your country. This article does not create any attorney client relationship and is not a solicitation.
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