How to Purchase a Business? Assets or Shares
The Difference between purchasing Assets and Shares: When referring to ‘buying a business’ (buying an existing business that is, i.e., an ongoing or operating business from someone), entrepreneurs are typically referring to one of two scenarios (whether they realize it or not). The first is to purchase the assets used for the operation of a business, or 2)to purchase the shares of a company.
Asset Purchase: An asset purchase is a transaction whereby the new business owner purchases the assets of an ongoing business from the owner of the assets (whether it be an individual person, or an incorporated entity, etc). Assets can include some, or all, of what is required to run the business. Examples of assets purchased in a typical small business asset deal include such things as equipment, goodwill and inventory.
Equipment refers to such items as the tables, chairs, computers, photocopiers, desks, etc. Inventory is any product sold in the business (i.e., if a corner store is the business, the food, snacks, etc.., are the inventory, if a book store, the books are the inventory). Goodwill is the value associated with the brand of the business, the value of the business name.
Assets are purchased from the person, or the company which owns them, so, the owner of the assets will change hands (tip – you will need what is called a bill of sale to evidence the change in ownership once you purchase them. Also note, this does not guarantee that they are free and clear of encumbrances (see this post soon). It is important to conduct due diligence on the assets.
Share Purchase: Acquiring shares of a company is very different than acquiring its assets. When you purchase shares, essentially you are purchasing the company. A Company is a legal entity, and can incur its own debt, liabilities, etc., and when you purchase shares, you purchase any good and bad with it. For example, if the company rightfully owes a lot of money, that debt stays with the company and becomes your responsibility to address as new company owner.
It is important to conduct proper due diligence to ensure you know what you are buying when you buy shares.
There are some very important considerations to be made when buy assets versus shares. Please make sure you speak to your advisor re; the risks and benefits of each, as well as any tax planning issues to be sure you choose the best way for your business / and personal goals.