Business Acquisitions: What You Need To Know To Be Ready For Success (Shares Vs. Assets)
As a business owner, you know that planning is important. That is never more true than when it comes time to sell your successful business or buy one from someone else. There are many considerations to be weighed. It is too risky to go in blindly.
This article will outline a few of the things you must carefully consider to ensure your upcoming deal is sound from both a legal and a financial standpoint.
An Initial Understanding Of Business Acquisition
Technically, you are selling or purchasing a business’ shares or assets. There are differences between shares and assets, and I will cover those in more detail below. Some of the acquisition process is the same for both. I’ll review these commonalities first.
The Agreement: Letter of Intent or Memorandum of Understanding
For instance, a letter of intent or memorandum of understanding may be entered into by all parties in either case. For our purposes here, the terms letter of intent and memorandum of understanding are interchangeable. This document acts as an outline and agreement of basic terms of the business transaction.
Issues such as exclusivity, any confidentiality or noncompete contingencies, purchase price, and initial purchase deposit are memorialized in writing. This type of agreement can be either binding or nonbinding, depending on the wishes of the parties. This is a crucial step that must not be missed. Even if the agreement isn’t binding, it is helpful to have a written document that establishes the initial meeting of the minds.
It is also wise to have an attorney look over this document to protect your interests.
Share Purchase Agreement
When all parties are satisfied with the terms of the initial agreement (i.e., letter of intent or memorandum of understanding), this document will be converted into a share purchase agreement or asset purchase agreement. This document is the primary, governing agreement regarding the transactions. It is binding and firmly outlines the representations of the parties regarding warranties, purchase price allocation, terms of any post closing consulting, and a myriad of other legal aspects of the deal.
If you haven’t involved your attorney by this stage of the process, it is certainly time to do so now.
Several ancillary documents may also be signed and agreed upon between the parties in order to effectively convey assets or shares.
Shares vs. Assets
Now to discuss the important differences in shares or assets from a business and legal standpoint.
Whether you choose to structure your acquisition or sale by share purchase or asset purchase often depends on the tax liability of each. There is generally a capital gains tax applicable to a deposit of shares, for instance. That being said, under some specific circumstances, shareholders are eligible to avail themselves of their lifetime capital gains exemption.
That is another issue you should consult an attorney or tax professional about before obligating yourself to a sale or purchase. This exemption could be up to $750,000.
Share Purchases Explained
When buying or purchasing shares, one is acquiring the majority of company shares in order to acquire the assets of that company. If more than one shareholder is at play, transferability of relevant shares must be explored. This is because additional shareholders could potentially have right of first refusal or be required by the company’s articles of incorporation to consent to the sale.
It is costly and disappointing to move toward the conclusion of an acquisition only to find out about a shareholder with cold feet and some level of control over the process.
Additional Points To Consider With Share Purchases
To help protect yourself and be an informed and empowered buyer, be sure you know the following:
Is the vendor the registered, beneficial shareholder with complete ownership thereof?
Are the shares you are purchasing completely free and clear of any and all liens or encumbrances?
Is the company you are purchasing under any existing contracts that will continue after you complete the acquisition?
Does the business you are buying have any ongoing or outstanding liabilities for which you may be libel?
Asset Purchases Explained
With an asset structured purchase, you have some flexibility as to which parts of a business you are actually acquiring. In this way, you can protect yourself by purchasing, for instance, assets but not liabilities.
Generally, the vendor is not part of the transaction.
Additional Points To Consider With Asset Purchases
As a part of your informed due diligence that you undertake before completing a business acquisition, consider the following regarding asset purchase situations.
● Do any other parties have any legal interest in the business assets? This may or may not include creditors.
● Are the assets you are acquiring in good condition?
● Do any contractual obligations exist that relate to your purchase of the business?
● Does the vendor have legal authority to sell the assets to you?
When purchasing the assets, pay special note to terms of employment and any outstanding issues. For instance, in some litigation circumstances, you could be viewed as a successor employer. This could land you in a situation where, for example, you are now bound by agreements entered into with union employees by your predecessor.
Additionally, employment is considered continuous and uninterrupted by business acquisition or sales by the governing Employment Standards Act (British Columbia). In this way, you the purchaser could unwittingly inherit obligations your predecessor entered into or was liable for during the course of an employee’s work history with the company.
This can be circumvented by terminating employees prior to the acquisition deal and immediately allowing the new owner to offer them employment.
Be Empowered And Informed
The choice you make will depend upon the individual legal advice you have received regarding your specific situation. That being said, the information in this article serves as a sort of cheat sheet help you navigate the exciting but in-depth arena of business acquisitions. Expanding your own personal knowledge in this area will help you have more empowered and informed discussions with your counsel and perhaps even result in a successful business transaction.