Share Purchases vs Asset Purchases

There are two methods that a buyer will typically use to acquire a business in British Columbia: an asset purchase or a share purchase. Each method has distinct characteristics and carries advantages and disadvantages for both the buyer and the seller.

Asset Purchase

In an asset purchase, the buyer will acquire specific assets (and liabilities) of a business rather than purchasing the entire company. Types of assets can include property, inventory, equipment, intellectual property and/or goodwill.

What can be purchased?

• tangible assets;
• intangible assets;
• goodwill; and
• liabilities.

How to Purchase Assets?

• Negotiation: The buyer and seller will agree on the purchase price of the assets and the terms of the agreement.
• Due Diligence: The buyer or their lawyer will review the company’s assets, liabilities, contracts, and other relevant information to determine any potential risks associated with acquiring the business.
• Asset Purchase Agreement:  The lawyers will draft a legal contract to specify which assets the buyer is purchasing, and which liabilities (if any) will be assumed. The asset purchase agreement will generally also set out representations, warranties, and other essential terms and conditions.
• Transfer of Ownership: After the agreement is completed, the seller will transfer the assets to the buyer.
• Tax Implications: The seller may be required to pay taxes on the sale of the assets and the buyer may need to consider capital gains taxes or other relevant taxes.

Advantages of an Asset Purchase:

• Specific Assets: The buyer can choose assets that support their business strategy and overall company goals, they are not required to purchase all the company’s assets.
• Limited liability: The buyer will not assume all the seller’s liabilities or debt, only what is agreed upon.
• Tax Benefits: The buyer may obtain a step-up in the value of certain assets resulting in prospective depreciation benefits.
• Employees: If employees are involved in the business, the buyer can choose to hire the employees, however the buyer does not automatically inherit the employment contracts.

Disadvantages of an Asset Purchase:

• Complex: Each asset must be transferred individually, which can be more complex.
• Employees: If the buyer decides to retain the employees of the business, they must negotiate new employment contracts.
• Contracts/Agreements: Existing contracts with customers or third parties are typically renegotiated.

Share Purchase

In a share purchase, the buyer will acquire the shares of the company that carries on the business, assuming ownership of the company itself, including all its assets and liabilities.

What is Purchased?

• Voting shares;
• Non-voting shares; and
• Preferred shares.

How to Purchase Shares?

• Negotiation: The buyer and seller will agree on the purchase price and terms of the agreement. It is possible for the buyer to request a partial buyout of the shares in comparison to a full buyout of the shares.
• Due Diligence: The buyer or their lawyer will review the company’s corporate records, assets, liabilities, and other relevant information to determine any potential risks associated with acquiring the business.
• Share Purchase Agreement: The lawyers will draft a legal contract specifying the number, class and kind of shares being purchased, the purchase price, representations, warranties, indemnities, and other essential terms and conditions.
• Approval: Upon the agreement being executed, corporate resolutions are passed effecting the transfer of ownership of the company from the seller to the buyer.

Advantages to a Share Purchase:

• Full Control: The buyer will assume full ownership of the company, including its business operations.
• Simple: Share purchases are typically less complex than an asset purchase with fewer transfers and filings.
• No Asset Transfer: The buyer does not need to individually transfer assets as they form part of the company.

Disadvantages to a Share Purchase:

• Depreciation: The buyer can not depreciate or amortize the company’s existing assets.
• Liabilities: The buyer will assume all liabilities of the company including:
  • Debt: Loans, credit lines, or other financial obligations of the company
  • Legal liabilities: Ongoing lawsuits or potential legal claims against the company
  • Contracts: Existing contracts with customers, suppliers, employees, and other third parties
  • Employee liabilities: The buyer assumes any employment contracts and benefits.

How Northam Law Can Help

The Northam team is here to assist in explaining the key distinctions, and advantages and disadvantages between asset purchases and share purchases. We understand that completing a business acquisition by way of either method requires providing sound legal advice and preparing comprehensive legal documents, therefore, it is well worth the time and cost to get legal advice before signing any contract.