This article are provided for information purposes only, and are not intended as legal advice.


Buying a business – the advantages of an asset purchase

February 8th, 2010

You found the perfect business to buy and not you want to put an offer to buy a business, what do you include in the offer?  Do you offer to buy the assets or the shares of the business?  What are the advantages of buying the assets of the business? 

 

Buying the assets of a business has many advantages.  Here is a list of some but this is not an all inclusive list

  • you know what assets you have purchased.  Often there is a detailed fixed asset listing.  If you purchased the shares of a business, you may not get a comprehensive list of what you purchased.
  • you know what liabilities, if any, you assumed.  Unless you assume a specific liability in your purchase and sales agreement, the additional liability is not yours.  If a supplier comes up to you after you closed the purchase of the business looking for money, you are not obligated to pay unless you assumed his liability.
  • when you purchase the assets of the business, you cannot have the same legal name of the business as the former owner.  Often, the names are very similar.  For example, if you have a business called ABC Inc, the new owner may call the new company ABC Ltd.  Similar in name however, legally, it is a different name.  Often lawyers make the old owner give up the name of the business so that they cannot compete and keep operating under the old name.
  • remember, the business of the old owner still exists – you bought the assets, not the shares of the business therefore you may want to ensure that there is a non competition agreement and a name change so that he does not start competing with you the day after you bought the business.
  • you are not liable for any unpaid sales taxes of the former business
  • you are not liable for any unpaid income taxes of the former business
  • you may be responsible for the employees of the former business.  If you purchased the business assets, the labour that generated revenue from the old business may be assumed by the new owner. You should check with your labour lawyer but you may have inherited their employment status.  If they started working for the old owner 25 years ago, and you decide to fire them, you may be required to pay severance based on 25 years of employment and not just the one month that they worked with you.  You may want to factor this potential liability into the purchase price that you are willing to pay for the assets of the business. 
  • when you buy the assets of the business, you may not have assumed any contractual liabilities/leases of the old business owner.  If you are taking over the leased facility of the old owner, you may need the landlord’s consent to assume the lease.  The owner of the original business may be liable for the lease until it expires even though you may have taken over the payments. The landlord may not have discharged the guarantee of the former owner.  If you default after you bought the assets of the business, the landlord may go after both you, as the new owner of the business and also the old owner of the business, if they are still on title as a tenant.  Many people do not realize that when a lease or debt obligation is assumed, that does not mean that the old borrow is released from the obligation.  You need to seek legal help in understanding your obligations if you sold the assets of the business.

Filed under: Buying a business — Gary Landa @ 12:23 pm


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