Neufeld Legal P.C.
Purchase Business - Strategy and Law of Buying a Business
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It is important to discuss with your advisers the type of transaction structure you wish to undertake to ensure that your proposed acquisition is conducted in a manner which best achieves your commercial objectives. There are various options you may consider, however we have focused our attention on the most common types of acquisitions: buying the assets of the business and buying the equity of the business structure.

When structuring the purchase of a business, it is also important to consider the taxation implications and the most appropriate method for financing the purchase.

Types of transaction structures

The two most common ways to purchase a business are:

1. buy the assets of the business; or

2. buy the equity of the business structure of the target (i.e., buy the shares of the company that operates the target business).

When buying the assets of the business, you are buying only the assets and perhaps some liabilities that are explicitly detailed (i.e., accrued employee entitlements) and you leave the ‘selling vehicle’ behind. Asset purchases are commonly used to protect the buyer from unforeseen liabilities including hidden tax risks.

Buying the assets can however be quite complex as you need to identify and prescribe a method of transfer for each asset. This will typically include the individual supply arrangements, customer contracts, real property conveyances, leasing arrangements and material contracts of the business. Sometimes, the transfer of these contracts will require consent from third parties before the transfer can take place. It is important to identify all material to be transferred which require third party consents early on in the process. This is one of the items which your legal advisers will be able to assist with in their due diligence process.

Buying the equity of the business structure involves the purchase of the shares of the target company for a specified price. When purchasing the shares, you take on all of the historical, actual and contingent liabilities of the business. In order to manage the risks associated with taking on such liabilities, a buyer will often seek extensive warranties and indemnities from the seller to protect themselves against these liabilities. In addition to this, a buyer may also seek to have part of the purchase price held on trust for a period of time as security in the event of a breach of a warranty or indemnity by the seller.

Employee Issues

How employees are dealt with will differ depending on whether you buy the assets or the shares of the business.

If you are buying the shares in a company, from an employment perspective, this is the simplest situation. Apart from possible provisions in employee contracts which provide for resignation and specific benefits to be paid upon change of control of the business, the legal identity of the employer remains the same. As a general rule, the existing contracts of employment as at the date of sale continue to operate.

The situation is more complicated when you are buying the assets of the business and you wish to retain some of the employees in your acquired business. An employee’s current employment contract will usually be with the seller or entities controlled by the seller.

When buying the assets, the employment relationship cannot be ‘transferred’ from the seller entity to the buyer as employment contracts are personal in nature. Ordinarily, it will be necessary for the seller to terminate the employment contract with the employee and for the buyer to enter into employment contracts with the employees. The rules governing the transfer of employees are complex as there are various industrial instruments (awards and certified agreements) which are industry specific and legislation (which differ from province to province) that the buyer will need to consider in order to gain a full picture of the obligations they will take on as the new employer. Buyers should be aware of the amount of accrued entitlements and costs arising from recognition of past employee service, which can vary depending on the terms and conditions of employment of each employee.

Taxation issues

There are different taxation and duties implications depending on whether you choose to purchase the shares or assets of the business. The form of purchaser acquisition vehicle, the structure of the purchase price, the location, the nature of the assets and the history of the assets being purchased and tax indemnities sought, are some of the factors which may affect the tax implications of the transaction. Prior to entering into the purchase, you should consult your legal/tax advisers to fully understand the potential tax implications of the transaction.

Identity of target entities

There are a number of different forms a target entity can take, including companies, partnerships, joint ventures and trusts. Different business structures will have different implications for the buyer. The most common form of business structure is a company limited by shares, which can take the form of either a proprietary company (called a private company in many other countries) or a public company. A public company may also be listed on a publicly traded stock exchange, unlike a private company.

For experienced legal advice when purchasing a business, contact business lawyer Christopher Neufeld at or by telephone at 416-887-9702 [Toronto]; 403-400-4092 [Calgary]; or 905-616-8864 [South West Ontario].


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The information presented herein is intended for information purposes only and solely as a general guide. The information is not intended as legal advice. It is a summary of selected/potential issues and does not represent a definitive or complete statement of strategies and law relevant to scenarios that are highly particularized, fluid and rarely, if ever, certain and fully disclosed. The information may not address the special needs, interests and circumstances of a particular scenario, with a single factor potentially necessitating an entirely different approach. Scenarios differ and you are strongly urged to seek specific professional business and legal advice.

Neufeld Legal P.C. is strategically positioned to effectively serve key Canadian business markets, with offices located in Toronto, Calgary, Mississauga and Burlington. As such, we are capable of effectively serving the western Greater Toronto Area (GTA), including downtown Toronto, Mississauga, Burlington, Oakville, Hamilton, Brampton, Milton, Guelph, Kitchener Waterloo, Cambridge, London, St. Catharines and Niagara Falls, together with the city of Calgary and southern Alberta. Copyright 2010.

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