Buying a business

Some people prefer to buy an existing business rather than start a new one. Acquisitions may also be a strategy for growing a business, entering a new market, or diversifying an existing business. In general, there are two ways to buy a business: an asset purchase or a share purchase.

An asset purchase allows the buyer to negotiate which assets and liabilities they intend to acquire. This deal structure may be a good option to limit the purchaser’s risks. On the other hand, it may require more paperwork to consummate the transaction. If the business has employees who will be transferred to the purchaser, their employment agreements may need to be terminated by the seller, and new employment agreements entered into with the new owner. Ownership of assets must be transferred, and transfer taxes may be owed. If the transaction also includes real property, transfer taxes will apply, and the parties will need to comply with applicable registration formalities.

In a share purchase, the purchaser buys the shares of the corporation. As a result, the assets of the corporation do not change hands. The purchaser does not directly own the assets but instead owns the corporation that holds them. In this type of transaction, there is little opportunity to select which past liabilities will remain with the business, unless a reorganization is completed before closing. Risk allocation is typically addressed through contractual provisions, including representations, warranties, and indemnification obligations of the vendor (risk mitigation strategies may be the subject of a separate article). The tax implications are also different, and share purchases are often used to achieve tax efficiency in the transaction, but each case requires an analysis from tax experts.

Regardless of the deal structure, the purchaser should always conduct due diligence to understand the risks involved in acquiring a business. Due diligence refers to the process of requesting and reviewing information related to all relevant aspects of the business. This process typically includes analyzing the target company’s corporate documents, reviewing title to real property, examining material contracts, and searching public records related to securities registered against the assets, bankruptcy, corporate status, regulatory compliance, and other legal matters.

Legal disclaimer: This text is for informational purposes only and does not constitute legal advice. You should consult a licensed lawyer regarding your specific situation.