Buying an established business can give you customers, equipment, and an operating history from day one. Before you agree on a price, though, make sure you and the seller mean the same thing by “buying the business.”

For someone buying a small business in Courtenay, Comox, or elsewhere in BC, an early decision is whether to buy selected business assets or the shares of the company that owns them. That choice affects what changes hands, which risks need investigation, and what the purchase agreement should address.

What is an asset purchase?

In an asset purchase, the buyer purchases specified property from the business owner. That might include equipment, inventory, the business name, a website, and goodwill. The agreement should identify both what is included and what is excluded.

For example, if you are buying a small repair shop, does the price include its diagnostic equipment, customer bookings, phone number, and domain name? What about stock that cannot be sold, leased tools, or deposits paid by customers for unfinished work? Turn those assumptions into a written list.

An asset purchase can give the buyer more choice about what to acquire and which contractual obligations to assume. It still requires careful investigation of debts secured against the assets and obligations that legislation may impose.

What is a share purchase?

In a share purchase, the buyer purchases ownership interests in a corporation. The corporation continues to own its assets and remains responsible for its obligations, including problems that may not appear in its financial statements. Buying its shares changes who owns the company.

That makes the company’s history important. An undisclosed tax issue, lawsuit, or warranty obligation can affect the value of what you have bought. BDC’s guidance on investigating a business purchase explains why reviewing liabilities matters alongside reviewing assets.

A share purchase is an option where the business operates through a corporation. A sole proprietor has no company shares to sell.

Check the lease and essential contracts

Do not assume buying a business gives you an unrestricted right to use its premises. Read the lease, amendments, and renewal provisions. Check what consent is needed for an assignment or a change in control of the tenant company. A share purchase does not automatically avoid a consent requirement.

Apply the same review to key customer, supplier, franchise, and equipment agreements. Identify permissions, notices, and replacement agreements needed before closing.

For example, a shop may have an attractive location but only six months left on its lease. If staying there is central to your plan, address a satisfactory lease arrangement as a condition of the purchase before committing to complete it.

Plan for employees and existing commitments

Request employment agreements, service dates, pay and benefit information, vacation balances, and details of outstanding workplace disputes. Work out who will communicate with staff and when.

For employment covered by BC’s Employment Standards Act, a sale can engage the continuity rule in section 97. Do not assume an asset purchase resets employees’ service to zero. Obtain advice about the proposed staffing arrangements before making offers or promising that everyone will start fresh.

Also identify customer deposits, gift cards, prepaid services, and unfinished orders. The purchase agreement should state which commitments the buyer will honour and how the price will account for them.

Resolve the tax questions before settling the price

Ask your accountant to compare the proposed structures and review how an asset purchase price will be allocated among equipment, inventory, goodwill, and other property. The CRA explains that these allocations affect the tax treatment of the purchase.

BC also advises purchasers to obtain a provincial clearance certificate before buying a business. Have your advisers address applicable taxes and clearance requirements in the closing plan.

Give yourself a clear process before you commit

Have a lawyer review a proposed offer or letter of intent before signing it. The wording determines which commitments are binding. Your documents should give you a workable process for reviewing information and deciding whether to proceed.

• Identify the buyer, seller, assets or shares, and any excluded property.
• Set deadlines for receiving records and completing legal and financial investigations.
• Address financing, landlord consent, and other approvals the deal depends on.
• Explain how inventory, deposits, and other closing adjustments will be calculated.
• Record the seller’s factual promises and the remedies for an undisclosed problem.
• Set out any training, introductions, or other transition help the seller will provide.

If part of the price will be paid over time, address payment security and what happens after a missed payment. A promise to pay and a practical way to recover the money are separate issues worth discussing.

Talk through your proposed business purchase

Postle Law helps small business owners with business purchases, contract review, and commercial agreements. If you are considering buying a business in the Comox Valley, book a consultation with Nicholas Postle to review the proposed deal and identify the steps to take before you commit.