Buying a new business is always a very exciting endeavor. It often means new milestones, new horizons, and new possibilities. It also presents difficulties and challenges that are important to consider and overcome to not only ensure a smooth transition, but also to ensure your business is positioned for future success. Below are Four Key Things every entrepreneur and businesspersons should consider as they navigate their business acquisition.
- Asset vs Share Purchase
The buying of a business usually takes one of two forms: an asset purchase or a share purchase. Both have different legal and tax consequences, which is why vendors and purchasers have different reasons for preferring each one. For vendors, a share purchase is often simpler and more advantageous from a tax perspective. Selling ones shares in a business means they are walking away from the business entirely, including any tax and debt obligations it may have with it. It also lets them take advantage of lucrative tax benefits if their business qualifies for the Lifetime Capital Gains Exception since the capital gains disposition upon sale can be exempt from tax up to a maximum of $883,384.
Purchasers of a business often prefer asset purchases because it allows them to pick and choose which parts of a business it wants to take on (which also means less due diligence costs), and the assets it purchase can sometimes be depreciated, allowing them to incur tax savings.
- Employees
Depending on the type of transaction, there are different employment law implications one must consider as well. In a Share Purchase Transaction, the existing employment law contracts of a target company have to be inherited by the buyer: vendors will often insist on this as a way to protect their soon to be former employees – as they also need to assuage themselves of liability for not providing reasonable notice or severance pay to their employees.
Asset Purchases will often require the re-drafting of employment contracts to suit the acquirer’s business interests. Buyers should not overlook the importance of ensuring those contracts are solid and in line with the business’ future outlook.
- Competition Clauses
The last thing you want after buying your business is for the Vendor to set up shop and siphon off their old clients (who are no your new clients), thereby lowering the value of the business you just purchased. To get around this, most acquisitions include restrictive covenants such as Non-Compete Clauses or Non-Solicitation Clauses which prevent the Vendor from conducting the same business in the same area as yours. These types of clauses can sometimes be difficult to enforce in Court however, because of how serious and restrictive they are. It’s essential to ensure your non-competition clauses are well-drafted so that they can hold up in Court and protect your business.
- Due Diligence
To ensure you are really getting what you’re paying for, proper due diligence is absolutely essential in any business acquisition. Lawyers will search the corporate records of the target corporation, share ownership, conduct searches to ensure the owners are not subject to any liens or executions, ensure compliance with regulations to ensure you won’t be left holding the bag for anything after you’ve bought the business, in addition to a number of other due diligence matters.
As in all such legal matters, its important to work with a firm you can trust will go above and beyond for you, and be there to guide you through the process and answer all your questions every step of the way. If you’re buying or selling a business, contact Omnia Law for a free consultation where we can discuss how to best handle your transaction and safeguard your assets.