Should I buy the shares or assets of a business?
by Jack W. Hope

When purchasing a business one of the first questions you must ask is whether the business is a corporation or not.  If it is not, you will have no choice but to buy the assets of the business from the former owner, that is the equipment, the inventory, the contractual rights and the goodwill.  On the other hand, if the existing business is a corporation you will have the option of buying the assets of the corporation, just as you would from a non- incorporated business, or you could simply buy the shares of the corporation from the former owner and take over as director and officer of the corporation.  It is much simpler to buy the shares of the corporation but it is also much riskier.  It is simpler because the transaction itself is easier.  The shares in the company are simply sold by the old owner to the new owner.  The business continues uninterrupted, there is no need to transfer ownership of the various assets and equipment and no need to re-register liens that might attach to the equipment.  There is no need to enter into new leases or new contracts with suppliers and business associates (although you may still need a landlord's consent to the change of ownership).  The risk, however, is that by buying the corporate shares you are also buying the corporation's debts and potential legal problems.  Perhaps corporate taxes are owing or may be declared owing after a reassessment or audit.  Perhaps someone is planning to sue the company for an act of negligence or a faulty product but no one is aware that this lawsuit is being planned.  Perhaps an employee that was fired six months ago will now sue for wrongful dismissal.  In any of these cases, the new owners of the company will be obliged to defend and possibly pay for these claims because they have bought the corporation itself, both its assets and its debts. 

In order to avoid these problems, many people choose to purchase the assets of a corporation instead of the corporate shares.  To accomplish this, it will be necessary to transfer the ownership of all assets and obtain a transfer of the lease of the business premises, together with the consent of the landlord.  If anyone holds a lien on any of the equipment they will have to be involved in the transaction and consent to it.  The person selling the company will have to prove that all inventory has been paid for.  As you can see, the transaction of an asset purchase is more complicated and time consuming, and therefore more expensive.  It is, however, less risky in that you do not buy the sometimes hidden debts and legal problems of the corporation because you are setting up your own brand new business entity to carry on the operations of the business you are buying.  There can also sometimes be significant income tax and capital gains tax consequences to both the vendor and the purchaser depending on whether the transaction is a share sale or an asset sale.  It is important to review this with your accountant before making the final decision.

To contact the author, please email jhope@smhilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.