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There are two types of deals when purchasing a business: (i) purchasing the underlying assets or (ii) purchasing its shares (assuming it's a corporation). In addition, a merger is a special type of share acquisition, where two existing businesses are integrated into a single corporate entity. In general, sellers prefer to sell the shares of their business, while purchasers prefer to acquire merely the underlying assets.

Purchasing a Business' Assets

A purchaser that acquires all or specified assets of the selling entity, may assume none, some, or all of the liabilities of the business. Aside from tax considerations, an asset purchase may be more attractive to the purchaser, since the purchaser may be able to pick and choose the specific items desired and can attempt to avoid assuming debts and liabilities of the selling entity. An asset acquisition is also designed to reduce the purchaser's exposure to possible unknown or contingent liabilities.

Whereas the tendency of most purchasers is to prefer an asset purchase, there are some circumstances in which an asset acquisition will not be appropriate, even from the purchaser's standpoint. For example, if there are certain licenses, trademarks, leases, or various contracts which are either not assignable or difficult to assign, it may be advisable to purchase corporate shares, rather than assets. Caution must be exercised even in this situation, however, because the more sophisticated contracts, leases, and franchise agreements are frequently treat a significant change in corporate share ownership as triggering a prohibition on assignment, and approval may be required even in corporate share purchase transactions.

When assets are acquired, appropriate documents must be prepared in order to effectuate the transfer of title to each particular asset which is being transferred. This can involve a great deal of paper work and may require approvals and consents from various other parties, depending on the entity which is being purchased.

Purchasing the Shares of a Corporation

The purchaser can acquire control of another company through the acquisition of the shares owned by the target corporation's shareholders. In this type of acquisition control of the acquired entity is obtained through share ownership, rather than a direct acquisition of the assets. The legal and corporate status of the acquired entity remains the same following the acquisition.

A share purchase is easier to accomplish since numerous separate conveyances of the assets are not required, and the seller can completely separate themselves from the business (except to the extent that any warranties or any obligations on which the seller might remain personally liable survive the closing).

Although one of the main non-tax considerations for the buyer in desiring an asset purchase is the risk of being saddled with unknown and contingent liabilities, the impact of this problem can sometimes be ameliorated by the establishment of holdback arrangements. Such arrangements typically involve escrowing of funds, rights to offset payments on vendor financed promissory notes, execution of non-negotiable promissory notes to evidence vendor financing, and provisions in the sale agreement in delaying the payment of the full purchase price until certain contingencies have been satisfied.

To retain the legal services of Toronto business lawyer Christopher Neufeld for purposes of undertaking a business acquisition, contact Neufeld Legal P.C. at 416-887-9702 or


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Toronto business lawyer Christopher Neufeld is a corporate commercial lawyer with the law firm of Neufeld Legal P.C. and is admitted to practice law in Ontario and Alberta (Canada) and New York (U.S.A.).  Christopher's legal practice focuses primarily on business law, in particular corporate commercial transactions (mergers, acquisitions, divestitures, business purchases and sales, etc.) and business contract work. Copyright 2010.

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