Buying a Business Through Share Purchase: Unveiling Top Concerns

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Buying a business is often the most significant event in a person’s professional life, so doing the job right is important.

A business purchase can be structured in two ways: via an asset purchase or a share purchase. The distinction between the two lies in the approach and scope of the acquisition.

In an asset purchase, the buyer acquires specific assets and liabilities of the business while leaving the seller’s legal entity intact. On the other hand, a share purchase involves acquiring ownership of the entire business by purchasing its shares, which includes all assets, liabilities and the legal entity itself.

Buyers generally prefer an asset purchase, but often have to settle for a share purchase – an arrangement that forces them to deal with the flip side of the asset coin: the company’s liabilities.

As a result, buyers need to conduct a robust due diligence assessment to ensure there are no skeletons in the closet of their new property.

The onus is on the purchaser to ask for all the information they need to make an informed decision before executing the transaction, so it’s important to put together a team of experienced legal and financial professionals who know exactly what to look out for.

To get you started, here are my top six issues to consider when buying a business through a share purchase:

1. Finances and taxes

Financial liabilities are probably the most intuitive for a purchaser to grasp, even if it can be tricky to translate them into an accurate assessment of a company’s financial health.

Buyers must be aware of any outstanding debts or guarantees the company is responsible for, since the new owners will assume liability for these after the share purchase.

Financial statements and balance sheets should also be closely scrutinized — in conjunction with supplier and customer lists — to ensure that the business is profitable, or at least has the potential to make money in the future.

Tax liabilities are among the most dangerous for a business, so potential buyers must confirm that it has paid everything owing to various levels of government, including payroll taxes, corporate taxes and GST, PST or HST.

2. Employees and Severance

In general, a share purchase will have no impact on employees’ status, since the identity of their legal employer is the same on either side of the deal.

Along with the company’s model workers, new owners may also find that they are inheriting some deadwood, including high earners who are no longer pulling their weight.

As a result, the due diligence process should include an assessment of expenses associated with possible severance or litigation, as well as the details of any non-competition, non-solicitation or confidentiality clauses in the contracts of key employees.

3. Litigation and regulation

A buyer needs to know if its target company is currently being sued or may be sued in the future due to the actions of its current owner.

As well as the threat of civil litigation, buyers should also be aware of any regulatory issues facing the company, particularly those in heavily regulated fields — where the failure to meet professional regulation standards, minimum insurance requirements or ensure compliance with laws and bylaws set by legislators at the federal, provincial or municipal levels could affect their ability to continue operating.

4. Intellectual Property (IP)

The importance of IP in the due diligence process varies wildly depending on the industry a business operates in.

For those in the tech sector — where the company’s IP is often its entire business — buyers need to confirm that their target owns all the IP that it requires to operate, and whether it will need to register new trademarks or patents to remain viable in the future.

If the business has a licence to use IP belonging to other entities or it licenses its IP to other companies, the precise terms of the agreements governing these relationships can make a big difference to the company’s value.

5. Exit routes

While many buyers are in their new business for the long haul, others take a much shorter-term view of their investment. If you intend to sell the business at some point in the future, it is never too early to begin identifying other potentially viable buyers in the marketplace, so that you can make your exit within your required timelines.

6. Renegotiation

Any number of issues can be unearthed during the due diligence process, and this list is not meant to be exhaustive.

And while some problems can be fatal to a potential deal, none have to be dealbreakers. The important thing for buyers is to make sure that their final decision to purchase is fully informed.

If a purchaser is uncomfortable assuming particular liabilities, they may be able to negotiate a lower selling price or set aside some of the proceeds to cover them directly. Representations and warranties can also be incorporated into the agreement so that buyers have potential avenues of recourse against vendors whose disclosures were misleading or false.

If you are considering buying or selling a business, don’t navigate the complexities alone. Consult an experienced business lawyer to ensure a smooth and successful transaction that protects your interests.
Contact us today to discuss your business goals and get the expert guidance you need.

*This post is not intended to be legal advice and should not be taken as such. Please contact McConnan Bion O’Connor & Peterson if you have any questions regarding this post or require assistance or legal advice regarding a business purchase.