Are you looking to purchase a business in Ontario?
Here, we break down for you some basic information on M&A transactions, the purchase/sale of assets vs. the purchase/sale of shares of a business, and the reasons why a buyer may wish to purchase the assets of the business, rather than its shares. Read on for answers to these important questions.
- WHAT IS M&A?
- ASSET PURCHASE VS. SHARE PURCHASE
- WHY WOULD A BUYER WANT TO BUY THE ASSETS?
- GETTING THE TRANSACTION STARTED
- HUMMINGBIRD LAWYERS CAN HELP
WHAT IS M&A?
Simply put, M&A stands for mergers and acquisitions. M&A describes the act of consolidating multiple businesses, or the shares/assets of a business, through a variety of different financial transactions. Whether it’s a restaurant or a software company, M&A transactions are often complex and require a lot of due diligence and paperwork to get the deal done right. For this reason, it’s always best to work with an M&A lawyer for all such transactions.
ASSET PURCHASE VS. SHARE PURCHASE
There are two ways to buy a non-publicly traded company in Ontario:
- Asset Purchase: Buying all or substantially all of the assets of a business (i.e. inventory, equipment, goodwill, trademarks, etc.); or
- Share Purchase: Buying all the issued and outstanding shares of a business.
For example, if somebody is the sole owner of a laundromat business in a commercial plaza, that business owner likely leased out a commercial unit from the commercial plaza owner (the landlord) to store the equipment (i.e. carts, washers, dryers, etc.) and inventory (i.e. laundry detergent and dryer sheets for sale) of the business. After decades of owning the laundromat business, the business owner decides that now is a great time to sell! The business owner can choose to either: 1) sell all the assets such as the equipment, inventory, and goodwill in the name “Richmond Laundry” – this is an Asset Sale; or 2) sell all the shares he/she holds in the laundromat business – this is a Share Sale.
WHY WOULD A BUYER WANT TO BUY THE ASSETS?
Buyers would ideally want to buy the assets of a business. This way, the buyer would only be responsible for the liabilities attached to those assets, not the liabilities of the entire business. On the other hand, sellers would ideally want to sell all the shares of their business. In doing so, they will be selling all of the business including both its assets and liabilities. Another reason buyers may prefer an asset purchase is because that way, he/she gets to pick and choose which assets to buy, and which to pass up.
There are also some tax advantages that come with asset purchases. It may be possible for the buyer to make deductions based on the depreciation of the assets as well as amortization credits, but each situation is different and we recommend buyers to discuss these options with their financial advisors as part of their due diligence.
GETTING THE TRANSACTION STARTED
Before signing an Agreement of Purchase and Sale, the parties to an M&A transaction will likely start with a letter of intent to negotiate and agree on the major terms of the deal. Once the letter of intent is signed, both parties would begin their due diligence. Due diligence often involves investigating and reviewing the books, financial records, contracts, proprietary rights, and insurance policies of a business, among other things particular to the deal. After completing their due diligence, the parties would proceed to sign the Agreement of Purchase and Sale and mutually agree on key deadlines of the deal.
HUMMINGBIRD LAWYERS CAN HELP
As mentioned above, M&A transactions are often complex and require a lot of due diligence and paperwork to get the deal done right. If you’re thinking about buying a business, the Business Law team at Hummingbird Lawyers LLP are here to help advise you on each step of the process.
With esteemed, skilled and capable lawyers in Toronto and lawyers in Vaughan, Hummingbird Lawyers LLP has locations in both areas to serve our clientele. Choose the location more convenient to you, and let us assist you with your legal matters. Contact us today for more information and see how we can be an asset to you.
