Buying a Small Business in BC: Share Purchase or Asset Purchase?

When you buy a business that is run through a company, you are not really buying "the business". You are buying either the shares of the company that owns it, or the assets the business is made of. The two routes end in the same place, with you running the business, but they get there very differently.

This article explains the practical differences between a share purchase and an asset purchase in British Columbia, why buyers and sellers usually start out wanting opposite structures, and the handful of issues, employees above all, that follow the business whichever route you take.

Two ways to buy the same business

In a share purchase, you buy the shares of the company from its shareholders. The company itself does not change; it simply has a new owner. Everything inside it comes along: the equipment and contracts, but also the tax history, the old disputes and anything nobody has discovered yet.

In an asset purchase, your own company (or you personally) buys selected assets from the seller's company: equipment, inventory, the business name, customer lists, goodwill and the contracts you choose to take on. The seller's company remains with the seller, along with whatever you left behind. A business run as a sole proprietorship can only ever be bought this way, because there are no shares to buy.

Liabilities: the biggest difference

This is the reason buyers tend to prefer assets. In a share purchase, every liability of the company stays with the company, which now belongs to you. A tax reassessment for a year before you arrived, a customer lawsuit about work done by the previous owner, an unpaid supplier: all of it lands on your company. Buyers manage that risk through due diligence, detailed representations and warranties from the seller, indemnities, and sometimes a holdback of part of the price, but the risk does not disappear.

In an asset purchase, you take on only the liabilities you expressly agree to assume. The seller's company keeps the rest. That cleanliness is attractive, although, as the next section shows, it is not complete.

Employees come with the business either way

Buyers sometimes assume an asset purchase lets them start fresh with staff. BC's Employment Standards Act says otherwise. Where all or part of a business is disposed of, the employment of its employees is deemed to be continuous and uninterrupted by the sale. An employee who carries on with you keeps their length of service for purposes such as vacation and compensation for length of service, and the obligations that go with that service become yours.

The practical consequences: get a complete list of employees, their start dates, pay and accrued vacation during due diligence, price the accrued liabilities into the deal, and decide before closing who is being continued. If an employee is not taken on, the question of who owes them what at that point needs to be dealt with expressly in the agreement rather than left to argument afterwards.

Tax: why the seller wants shares and the buyer wants assets

Sellers usually prefer to sell shares for one large reason. An individual who sells shares of a qualified small business corporation may be able to shelter the gain with the lifetime capital gains exemption, which for dispositions on or after June 25, 2024 is $1,250,000. Selling assets out of the company does not qualify for that treatment; the gain is taxed inside the company and the proceeds then have to be taken out.

Buyers, meanwhile, often prefer assets because they can allocate the price among the assets they acquire and claim depreciation on the amounts they actually paid, rather than inheriting the company's historical tax values. GST and provincial sales tax also apply differently to the two structures. The result is that the choice of structure and the price are negotiated together: a seller who insists on a share sale may have to accept a lower price, and vice versa. Whether the exemption is available at all depends on tests that need to be checked well before the sale, which is why the accountant should be in the room early.

Leases, licences and contracts

In a share purchase the company's lease, supplier contracts and licences stay where they are, because the company that signed them has not changed. Many commercial leases and key contracts nonetheless contain change-of-control clauses that require the other side's consent when the company's ownership changes, so "nothing needs to be assigned" is rarely the whole story.

In an asset purchase every contract you want has to be assigned to you, which almost always means the landlord's consent for the lease and, for regulated businesses, fresh applications for licences in the buyer's name. The time this takes often sets the closing date.

Due diligence, whichever route you take

The homework overlaps heavily. Confirm the seller's company is in good standing with BC Registries and who actually owns it. Search for security registered against the business's assets, which must be discharged or assumed at closing. Review the financial statements and tax filings, the lease, the major contracts and any litigation. Check the employee list described above. And negotiate the seller's non-competition covenant and transition assistance, because the goodwill you are paying for walks out the door if the seller opens up across the street.

Deciding which is right for you

There is no universally correct answer. A clean company with a long track record, a seller who needs the share sale for tax reasons, and a buyer willing to rely on strong indemnities may make a share purchase sensible. A business with a complicated history, or one where the buyer only wants part of what is on offer, points toward assets. What matters is that the structure is settled, and understood by both sides, in the letter of intent, before anyone drafts a purchase agreement.

Buying or selling a business? Get the structure right before the price

Our business purchase and sale lawyers act for buyers and sellers of small and mid-sized businesses across Metro Vancouver, from the letter of intent through due diligence to closing, and work alongside your accountant on the structure.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.