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Determining the Structure of the Transaction – Asset Purchase vs. Share Purchase
One of the first and most important considerations when buying or selling a business is determining how the transaction will be structured. In Ontario, the two most common methods are asset purchases and share purchases, each with distinct legal, tax, and risk implications for both the buyer and the seller.
In a share purchase, the buyer acquires all (or a controlling portion) of the shares of the corporation from the current owner. The legal entity remains intact, and with it, all its assets, liabilities, contracts, employees, and obligations. This approach is often more streamlined operationally, as the business continues uninterrupted. However, the buyer assumes historical liabilities—known and unknown—which increases the importance of thorough due diligence and robust indemnity provisions. Share sales may also allow the seller to access the Lifetime Capital Gains Exemption (LCGE) on qualifying shares of a Canadian-controlled private corporation, providing significant tax benefits if the corporation meets the necessary criteria.
In contrast, an asset purchase involves the buyer acquiring selected assets of the business, such as equipment, inventory, intellectual property, goodwill, and contracts. The corporation remains in the seller’s hands, and the buyer does not assume its historical liabilities unless specifically agreed. This structure offers more flexibility and protection for the buyer, who can “cherry-pick” assets and exclude unwanted obligations. However, it typically requires more administrative work, such as assigning leases, licenses, and contracts, and may not allow the seller to benefit from the LCGE. The structure must also be reviewed carefully in light of potential tax consequences for both parties.
The choice between a share or asset transaction should be made early and in consultation with legal and tax advisors, as it influences deal pricing, negotiations, required approvals, and documentation. At Jahanshahi Law Firm, we help clients evaluate both options in light of their commercial goals, tax positions, and risk tolerance, ensuring the deal is structured in the most advantageous way possible.
Due Diligence and Research
Due diligence is the process by which a buyer investigates the legal, financial, and operational condition of a business before completing a purchase. It is a critical step in any business acquisition and helps uncover risks, liabilities, and deal-breakers that may not be immediately apparent. A thorough due diligence process informs negotiations, supports valuation, and guides the terms of the definitive purchase agreement.
Legal due diligence typically involves reviewing corporate records, organizational documents, minute books, shareholder agreements, customer and supplier contracts, employment agreements, real estate leases, intellectual property rights, pending litigation, licenses, and regulatory compliance. It also includes verifying the proper registration of business names, reviewing financing documents for encumbrances, and ensuring there are no hidden liabilities or off-balance-sheet obligations.
In a share purchase, the scope of due diligence is generally broader because the buyer inherits the entire legal entity and its history. In asset transactions, the focus shifts to verifying title to assets, consent requirements for assigned contracts, and any liabilities tied to transferred assets (e.g., environmental issues or equipment leases).
Financial and tax due diligence—typically led by the buyer’s accountant or tax advisor—complements legal due diligence and includes an analysis of financial statements, tax filings, working capital, and revenue trends. Where appropriate, this process may involve specialists, such as IP lawyers, employment counsel, or environmental consultants.
At Jahanshahi Law Firm, we lead and coordinate the legal due diligence process, working collaboratively with your financial and tax advisors. We identify red flags early, recommend strategies to address them, and ensure that any representations, warranties, and indemnities in the agreement reflect the actual risks uncovered—protecting your interests as you move toward closing.
Our Experience and Knowledge
We have experience representing businesses in transactions from a variety of backgrounds including but not limited to restaurants, bars, personal care businesses, private schools, pharmacies, dental practices, manufacturers, online businesses, retail stores, property management companies, wholesale distributors, various franchises, car dealerships, software engineering firms, and construction companies. We treat every transaction with care, and we truly enjoy structuring and working on every transaction. We take pride in obtaining ideal results for our corporate clients who are often faced with the challenges of a complex legal and business environment.
If you are planning on buying or selling a business, call us today and set up a consultation with us during which we can answer any questions you have about buying or selling a business.
FAQ
What is a business lawyer’s role in representing a party in a business buy or sell transaction?
When representing the buyer or the seller, our business law team will be responsible for drafting documents or contracts related to the transaction. This may include a letter of intent, share purchase agreement, asset purchase agreement, and relevant closing documentation. When representing the buyer, we are also responsible for conducting legal due diligence on the target corporation to ensure the buyer is not incurring liabilities not previously disclosed by the seller. Once due diligence is complete, we will finalize the transaction by exchanging closing funds and documents. Finally, upon closing of the transaction, we will attend to any post-closing matters and provide you with a report that sets out information about your transaction. You should never attempt to navigate the intricacies of an asset or share purchase transaction without active engagement and consultation from an experienced business lawyer.
How Much are the Legal Fees for Representing a Buyer or the Seller?
While we offer flat fees for some smaller business buy and sell transactions, most commercial transactions are charged at the business lawyer’s hourly rate. This is because purchasing or selling a business can become extensive and may require the business lawyer to take the time to diligently investigate matters and research topics to ensure the client is adequately protected. In certain circumstances, we may be able to provide you with an estimate of legal costs and disbursements prior to initiating work on the matter.
For more information about buying and selling businesses, we invite you to visit the Business Law Insights section of our website.