Understanding Asset Sales and Purchases
Understanding Asset Sales & Purchases
What you need to know when letting go of an asset
Woodbridge corporate and securities lawyer, Joseph Chiummiento, of Core Lawyers, describes what you need to know or can expect when selling your business.
Deciding to buy or sell a business that has been established and running like a well-oiled machine can be difficult. Making sure you receive/pay a fair price, look after key intellectual property (i.e. employees), and ensuring customer retention/happiness all factor into the decision-making process.
Asset Sales vs. Share Sales
What is the difference between an asset sale and a share sale? Simply put an asset sale involves selling all or substantially all of the assets of the business to someone else, and you retain your corporation. A share sale is a sale of the shares you own in your business to someone else and you retain nothing.
Why choose an asset sale over a share sale
Buyers like asset sales because:
- Liability: The perceived liability is limited (ie. you are not buying a company with all its liabilities and are simply buying assets, physical, intellectual property or contracts).
- Employee Issues: There is less liability from employee termination or severance continuation as employees are normally terminated first then offered employment with the new entity.
- Tax Considerations: Assets can be depreciated from the value fixed for by the purchase agreement and any historical tax issues of the seller’s company remain with that company (for the most part).
What is your business worth in an asset sale?
Is the Purchase / Sale Price Fair
This is a more tricky question and usually requires the involvement of an Accountant. Generally, valuations will fluctuate based on industry and type of business. Some will look at multiples of sales, some multiples of EBITDA, some based on multiples of profit.
A couple key considerations that should be considered before the purchase prices is finalized include:
- Employee Termination: If no employment agreements existed between the seller and its employees there could be up to a 24 month termination pay requirement to an employee. The general rule of thumb is that employees without an employment contract are entitled to (Employment Standards Act) notice and an additional 1 month per year of service to a maximum of 24 months depending on age, title, years of service and responsibility pre-termination/sale. Any such payment should be factored into the price.
- Collection of Accounts Receivables: collecting post-closing assuming the name of the corporation is an asset being purchased in the transaction. What rights will remain to contact customers, jointly work with buyers to collect funds, or request or audit of buyers records to know if receivables have been paid by customers after the closing?
- Other Issues: are there warranty rights to a product or service you provided that could come back to reduce a receivable? Is your non-compete/non-solicit fair – does it allow you to work in the industry but not compete, how is it defined? Is the purchase price paid in full on closing or is there a vendor take-back mortgage, promissory note or bank financing that you are required to subordinate to (i.e. go in the second position to)?
Having someone to talk through these key considerations in an asset sale or purchase transaction can have a great impact on the experience of decision making through an important corporate transaction. When buying or selling something that took years to build don’t sign an agreement blindly, get some advice from a lawyer, accountant or real estate agent.
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You can reach
Joseph Chiummiento at
905-851-8180, ext. 2
joseph@corelawyers.ca