Generally speaking, there are two options for buying a business: a share purchase or an asset purchase. In a share purchase, the purchaser buys the shares of the company that operates the business and that owns the assets of the business. Therefore, the purchaser would not own the business or the business assets directly but rather, through the company. The company would continue to have all of its liabilities and rights, including its tax history, any lawsuits, and its obligations to its employees. Due diligence investigations are therefore extremely important when contemplating a share purchase. The purchaser must be satisfied that all of the assets required to conduct the business are owned by the company and must also be satisfied that any liabilities are identified and appropriately addressed. There may be a capital gains tax exemption available to the selling shareholder that could result in a reduction in the purchase price.
In an asset purchase, the purchaser buys specific business assets. Due diligence investigations are important in order to determine which business assets are required to operate the business. The purchaser can exclude unwanted assets and has a better opportunity to avoid inadvertently taking on liabilities associated with the previous conduct of the business. Continuing contracts associated with the business, such as a lease or supply agreement, must be individually addressed to ensure that they can be transferred; if not, they must be renegotiated. There is no capital gains tax exemption available to a Corporation that is selling its assets. In fact, depending on the allocation of the purchase price, there may be a tax liability for recapture that would be payable by the company selling its assets.