For those looking to get into business, starting from scratch is not always the best option. In fact, some distinct advantages can come from purchasing a pre-existing business: a customer base has already been established, a brand has been built, employees have been hired and trained, and a cash flow exists. What’s more, there is often room for improvement and innovation under new management.
Before diving into the purchase of your first business however, there are some important legal factors to consider.
The decision with the greatest impact on a business purchase is whether you are going to buy the assets of the business or the shares of the business. Although every transaction is unique, a general statement that can be made about the buying and selling of a business is that buyers prefer to buy assets and sellers prefer to sell shares. But why?
Simply put, when you purchase all of the shares of a company you become the owner of everything that company owns. While total ownership might sound like a good thing, it isn’t always so. A share purchase means you own all of the company’s valuable assets, but you also take on all of its (potentially large) liabilities. Any outstanding debts of the business become your debts, issues with past employees become your issues, potential lawsuits become your potential lawsuits.
Conversely, you could choose to do an asset purchase. What this means is that instead of buying the shares of “Lenny’s Laundromat” and taking over the entirety of the business’s assets and liabilities, you get to be selective. Perhaps you want the high quality laundry machines but not the old coal-fired dryers. You want the machines, but not the employees. Perhaps there are lease and licensing agreements in place which you are not interested in preserving or becoming a party to. A big benefit of an asset purchase, and a big reason buyers prefer buying assets, is because it is more tailored to the desires of the buyer and has less risk when compared to the purchase of an entire business.
There are, however, downsides. An asset sale requires very particular documentation to ensure that ownership of the assets is properly transferred from seller to buyer. Since assets can be anything from real to intellectual property, trucks to licenses, microwaves to Mercedes, a few issues can arise. Firstly, it can be difficult to identify exactly which assets a buyer wants to purchase and those he or she does not. Secondly, given the variety of assets often available for purchase there will be many different types of paperwork to be completed (and completed correctly) in order to ensure title is properly transferred.
The above are some basic considerations for those looking to buy a business. Of course, there are tax considerations as well, but we’ll save those for another article. This article was written by Brian Stephenson, an articling student currently working in our Business Law Group.
Andrew Brunton is a business lawyer at Pushor Mitchell LLP. You can reach Andrew at 250-869-1135 or [email protected]. Our office offers a wide range of legal services to all types of corporations. For more information on our Business Law Team, please visit Business Law.
