So You're Considering Buying a Business? A Primer on Asset Purchase Transactions for Purchasers

You are deciding to take a leap and purchase a business, but you are not sure how best to structure the agreement. Let's take a look at the different types of purchase transactions available.

What is the Difference between an Asset Purchase and Share Purchase Transaction?

An asset purchase involves the purchase of some or all of the assets, such as equipment, inventory, real property, goodwill, contracts or lease agreements (to name a few) of a business, whereas a share purchase involves purchasing 100% of the corporation's shares, effectively transferring everything to the purchaser.

Typically, an asset purchase transaction requires an increased amount of documentation, as opposed to a share purchase, in order to properly transfer each asset to the purchaser and in some instances, third party consent may be required prior to the transfer where there is a lease, licence or permit involved. Most purchasers prefer an asset purchase transaction, which will be explained in more detail below.

Asset Purchase Transaction

A purchaser will often favour an asset purchase transaction because it allows them to be selective of the assets they wish to purchase. For example, a purchaser may only be interested in the inventory and equipment that the business owns. Other aspects that are favourable to a purchaser are as follows:

• there is less liability risk to the purchaser as they are not required to assume the liabilities the business has, for example any legal claims, CRA debts owing, or employment issues; and
• there is no legal obligation for the purchaser to agree to employ the employees of the business.

Some potential disadvantages to an asset purchase transaction for a purchaser are as follows:

• there may be high costs and GST and PST taxes associated with the transfer of land and other property payable by the purchaser;
• a third party may refuse to consent to assign contracts which the purchaser considers to be vital to in the purchase of some of the assets of the business;
• the seller may require the purchaser to offer employment contracts to all current employees which are substantially similar to their current terms; and
• some assets, such as government licences and permits, may not be assignable.

One final consideration that is important in an asset purchase transaction is the purchase price allocation for the assets. This will dictate the taxes payable by the purchaser and after-tax proceeds for the seller. Purchasers are generally motivated to allocate more of the purchase price to inventory or depreciable property in order to benefit from higher tax depreciation claims going forward, whereas on the other hand, owners want to minimize income on the sale of inventory and recapture capital cost allowance previously deducted on depreciable property.

Clearly, there is a lot to consider when choosing how to structure the purchase of a business and in some instances, a share purchase may be more favourable to an asset purchase depending on the exact circumstances. As a purchaser, it is important to think about the potential liability and tax implications you may incur and to take steps to protect your investment. There are ways to mitigate such risks and therefore, it is beneficial to obtain appropriate advice from qualified advisors, such as the lawyers at McDougall Gauley LLP before pursing a purchase opportunity.

Now that you understand the pros and cons of an asset purchase, read Part 2 of this M&A series to learn more about the pros and cons of a share purchase in an article titled “So You're Considering Selling your Business? A Primer on Share Purchase Transactions for Sellers?”