CS Law column: Buying a business – assets vs. shares

CS Law solicitor Riana Smith.

OPINION

Levin's longest-serving law firm is still very invested in the community it is a big part of.

When buying a business, an important consideration is whether you purchase the assets of that business or buy shares in that company.

An asset purchase is the purchase of the business’ “tangible” assets (plant, equipment, stock in trade) and “intangible” assets (intellectual property and goodwill). You may form a new company to purchase the business and operate the business using the same trading name (if included in the purchase as an intangible asset).

With a share purchase, the existing shareholders of a company sell their shares to you. The company continues to exist after settlement, generally under the same name, and all assets owned by the company stay with the company.

Important factors to consider in an asset purchase are:

You choose the assets you wish to purchase, whether this be all the business’ assets or only some.

There is less risk for you as a purchaser, as assets are generally purchased free of any security interests. Unless agreed, you do not acquire any liabilities - these remain with the vendor.

Likewise, you choose what contracts of the vendor you need to operate the business. These contracts will need to be assigned to you, or new contracts entered into. This will involve obtaining the consent of the other parties to the contracts.

Employees are not automatically transferred to a purchaser. The vendor will need to terminate all employment agreements and you elect which staff you wish to re-hire (if any).

Any licences, permits or consents required to operate the business will need to be transferred to you.

Important factors to consider in a share purchase are:

Not only do the assets owned by the company remain with the company, but so do all liabilities of the company (whether these liabilities are known to you or not). This includes any future liabilities which arise after settlement, such as tax liabilities. It is therefore important that the agreement has the appropriate vendor warranties. This includes an obligation for the vendor to disclose any liabilities it has knowledge of and a warranty that the information provided is true and accurate. To reduce any risks, it is also vital you carry out a thorough due-diligence investigation into the company’s financials and its tax position.

As the company continues, any contracts the company has will remain in place. Notwithstanding this, it is common for contracts to include a “change of control” provision, whereby a major change in a company’s shareholding is deemed an assignment of the contract, allowing the other party to terminate the contract if their consent was not obtained prior to the share transfer.

Licences, permits and consents held by the company will also remain in place. Likewise, it is important to review the conditions of these (and the relevant statutory provisions), as you may need to obtain the consent of the issuing entity.

Generally, employees will be employed by the company. As such, existing employee agreements will not be terminated; employees will transfer with the company, along with all employee entitlements.

Both options have their benefits, as well as their disadvantages. However, it is important you speak with both a lawyer and an accountant first so to best minimise your risks.

CS Law is a Levin-based law firm.