Buying a Business
Assets vs Shares – are there different ways of buying a business?
There are two basic ways of acquiring an existing business, through the purchase of assets or by buying at least 51% of the shares of the company which runs the business.
Costs – what are the costs associated with the two methods of buying a business?
Generally, purchasing assets is a less expensive procedure. Title to the assets can be searched in order to ensure good title. The agreement entered into between the buyer and seller should contain a series of warranties or guarantees given by the seller to the buyer. lt is for this reason that we strongly suggest you consult with your own professional advisor before signing an Agreement of Purchase and Sale to ensure that your investment is protected by a well crafted agreement limiting your exposure to the maximum extent possible.
If you are going to be buying the shares from the owner(s) of his, her or their company then your exposure is much greater. In effect, you are buying the history of the company and with it all Liabilities, both past, current and future, that might exist. Often there is no search mechanism available to be able to satisfy a buyer’s concerns. In this instance it is absolutely imperative that you seek the advice of your own professional advisor before entering into any agreement. In addition to the underlying liability issues there are significant tax related issues which will affect the purchase price. Buying the shares of someone else’s company is something that definitely requires a lawyer’s expertise.
Due Diligence – what work has to be done when buying a business?
When you are buying a business whether by way of asset purchase or share acquisition, there are a certain number of searches that must be conducted (often referred to as due diligence) to ensure that the business you are acquiring is free of any potential liability to you, the buyer. Searches attract certain costs regardless of the value of the business being purchased. This can be unsettling to a buyer who feets that the costs appear to be excessive in relation to the price he or she is paying for the business. Often buyers can not see the justification of spending, what appears to be [large sums of money, when the purchase price, by comparison, is minor.
Once a buyer understands what is involved and why, he or she develops a much greater understanding of the process and costs associated with it. Remember, it doesn’t matter what the value of the business is. Everything is relative. Whether a buyer is spending $5,000.00 or $500,000.00 the purchase of a business generally represents a major commitment of that persons resources. If the purchase price represents “play money”, i.e. you don’t care if you lose it or not, then avoiding the costs of searches is not prudent but acceptable. However, for most people, the purchase price represents an investment, no matter how large or small, that is often his or her life savings and should be treated as such.