Buying or Selling a Business? Read This First!
Thinking of buying a new business or selling your existing business? Here are a few points to keep in mind.
If the business is owned by an individual or partnership, you must buy or sell the assets. But if a company owns the assets and carries on the business, the transaction may be structured as either a purchase and sale of the assets or of the shares. How to decide?
A seller generally pays less tax if selling the shares of DDDDelicious Doughnuts Ltd. than if selling the company’s equipment, furniture and inventory. The price is thus often less for a share sale than for an asset sale.
Also, in a share sale, the buyer gets the company’s goodwill built up over the course of the business. This is important if you, as the purchaser, are relying on the bakery’s reputation to keep customers munching their daily doughnuts and you rolling in the dough. But if you buy the assets, you don’t get the “DDDDelicious Doughnuts” name unless you specifically purchase it. So, while you may get the same location, ovens and blue wicker chairs, you may not get the same customer loyalty in an asset sale if you cannot buy the name. “Bob’s Bakeshop” may not have the same draw as “DDDDelicious Doughnuts.”
On the other hand, a share sale means acquiring the entire business, so the buyer assumes all its liabilities, including potential ones which may be unknown when making the deal.
Also, in a share sale, consents may be needed from many people if the shares are owned by more than one person. This can be a huge hassle if you have to deal with Dave Dutton, his bitter ex-wife and his former mother-in-law who lives in Texas, all of whom own shares in the business. In an asset sale, you only deal with the company that owns the assets (assuming shareholder authorization).
For these and other reasons, a seller generally prefers to sell shares, while a buyer may prefer to purchase assets.
Contact your lawyer before you start negotiations. The best way for a buyer to approach the purchase may be by a non-binding letter of interest. You can then examine the company’s financial statements and other records to find out the true financial state of the business before committing yourself.
You’ll also want the seller to agree to a non-competition provision. You don’t want Dave, who’s just sold you the business of “DDDDelicious Doughnuts,” opening up “Dave’s Decadent Doughnuts!” right next door and stealing your customers. But any non-competition restriction must be reasonable. It can’t cover too long a period of time or too wide a geographical area, nor restrict conduct beyond the scope of activities of the business purchased.
You also need to consider the employees. Some may be critical to the ongoing success of the business and will need to be committed through employment agreements. Issues of severance pay and successor employee rights for such things as seniority and termination pay calculations need to be taken into account.
Finally, you’ll want to get as many warranties and representations about the business as you can. Sellers will, of course, want to limit these.
Your lawyer can help guide you through the maze of options to reach the best possible deal in your particular circumstances.
Peak Law Group has decades of experience helping businesses of every size. We're in the business of helping you achieve your goals. Please give us a call at 604-465-9993, or email us at info@peaklaw.ca, to schedule a free initial consultation.