You've built a business and now want to exit. Or you're acquiring a company to expand operations. Either way, the transaction's structure and execution will significantly impact financial outcomes and future liabilities.

Asset Sale vs. Share Sale

The fundamental choice shapes everything that follows.

Asset Purchases
Buyers prefer asset purchases. You acquire specific assets and assume only designated liabilities. Employees don't automatically transfer. Tax benefits often favor buyers through asset write-ups.

But asset sales are complex. Every asset must be transferred individually—real property, equipment, intellectual property, contracts. Third-party consents may be required. Sales taxes apply.

Share Purchases
Sellers prefer share sales. One transaction transfers the entire company. Contracts, licenses, and employees stay with the corporation. Simpler documentation. Often better tax treatment for sellers through capital gains exemptions.

But buyers inherit all liabilities—known and unknown. Historical tax issues, environmental problems, or litigation risks transfer with the shares.

The choice depends on circumstances, negotiating leverage, and tax considerations for both parties.

Valuation and Price Structure

How Much and How Paid
Purchase price may be fixed, adjusted based on closing working capital or net assets, or include earnouts tied to future performance.

Working Capital Adjustments
Most deals include mechanisms adjusting purchase price based on actual working capital at closing versus target levels. These provisions are frequently disputed post-closing.

Earnouts and Holdbacks
Earnouts tie portions of purchase price to future performance. They bridge valuation gaps but create ongoing relationships and potential disputes. Holdbacks secure indemnification obligations.

Due Diligence: Buyer's Investigation

Buyers must investigate thoroughly before committing.

Financial Due Diligence
Review financial statements, tax returns, and accounting records. Understand revenue sources, cost structures, and profitability trends. Identify any aggressive accounting or one-time items inflating results.

Legal Due Diligence
Examine corporate records, material contracts, litigation, regulatory compliance, intellectual property, real estate, employment matters, and environmental issues.

Operational Due Diligence
Understand the business beyond financials. Customer concentration, supplier relationships, key employee dependencies, technology systems, and operational risks affect value.

Deal Breakers
Due diligence often uncovers problems—undisclosed liabilities, contract issues, compliance failures. Serious issues may terminate deals, renegotiate price, or require specific indemnifications.

The Purchase Agreement

The purchase agreement governs the transaction and allocates risk between parties.

Representations and Warranties
Sellers make statements about the business—financial condition, legal compliance, absence of undisclosed liabilities, ownership of assets. Breaches trigger indemnification obligations.

Buyers negotiate broad representations. Sellers resist or limit through disclosure schedules identifying exceptions.

Indemnification
When representations prove false or undisclosed liabilities emerge, indemnification provisions determine who pays. Negotiated terms cover scope, time limits, thresholds (baskets and caps), and procedures.

Closing Conditions
Deals close only if conditions are met—due diligence satisfaction, third-party consents, regulatory approvals, financing, no material adverse changes.

Material adverse change clauses protect buyers if the business deteriorates significantly between signing and closing.

Restrictive Covenants
Non-competition and non-solicitation agreements prevent sellers from competing or poaching customers and employees. Reasonable scope and duration are enforceable in Ontario.

Transition Considerations

Employee Matters
In asset sales, determine which employees transfer. Provide required notices. Address pension and benefit continuity.

In share sales, employment continues but change of control may trigger obligations under employment agreements or retention concerns.

Customer and Supplier Relationships
Notify key relationships appropriately. Obtain required consents for contract assignments. Maintain continuity to prevent disruption.

Intellectual Property Transfer
Ensure proper assignment of trademarks, domain names, proprietary software, and trade secrets. File necessary registrations.

Lease Assignments
Real property and equipment leases require landlord or lessor consent for assignment. Negotiate these early as they can delay or prevent closings.

Tax Considerations

Tax consequences differ dramatically between asset and share sales and depend on corporate structure, whether corporations are CCPCs (Canadian-Controlled Private Corporations), and utilization of available exemptions.

Sellers may access capital gains exemptions on qualifying small business shares. Buyers may obtain better tax attributes through asset purchases. Tax planning should drive structure decisions early.

Financing the Purchase

Buyers using debt financing must secure commitments early. Financing conditions in purchase agreements protect buyers if lenders don't deliver. Sellers want certainty and may require proof of financing or prefer cash buyers.

Seller financing—where sellers take back promissory notes for portions of purchase price—can facilitate deals but creates ongoing creditor relationships with attendant risks.

Professional Advisors

Successful transactions require coordinated professional teams.

Legal Counsel
Experienced M&A lawyers structure deals, conduct due diligence, negotiate agreements, and manage closings.

Accountants
Tax advisors optimize structure. Auditors perform financial due diligence.

Business Valuators
Independent valuations support pricing negotiations and tax planning.

Invest in quality advice. The cost is insignificant compared to deal size and consequences of errors.

Timeline and Process

Business sales typically span months. Preliminary negotiations and letters of intent establish basic terms. Due diligence follows. Agreement negotiation and drafting takes weeks. Regulatory approvals or third-party consents extend timelines further.

Maintaining momentum while being thorough requires experienced guidance.

Buying or selling a business? Contact Hodder, Wang LLP for strategic legal counsel on business acquisitions and sales.

This article provides general information. It does not constitute legal advice for specific transactions.