Elton was offered an opportunity to purchase shares in a company, and without obtaining legal advice, he purchased the shares.

A few months later, the company received an invoice from one of its major suppliers requiring it to pay a significant amount of money, which if paid would result in the company becoming insolvent.

Elton was totally unaware that he was “on the hook” for the company’s outstanding liabilities when purchasing shares.

If you are thinking of purchasing a business it is vital to consider how you will purchase the business. There are usually two options to decide from, purchasing the shares or purchasing the assets of the business.

Deciding on the best option is dependent on your situation.

Share Purchase

A share purchase is where a shareholder in a Company agrees to sell their portion of the Company’s shares to a purchaser.

When the shares are sold, the Company will remain in existence and the business will continue to trade (usually under the same name). However, the structure of the company in terms of its shareholding will have altered. A benefit of this is that existing contracts can generally remain in place.

A share purchase is usually straightforward for the vendor.  The buyer will usually have to be cautious of this option as it can result in the buyer inheriting any undisclosed liabilities of the company, as in the situation above.

It is critical to seek legal advice before deciding this option so that your lawyer can ensure that there are vendor warranties in place to disclose all liabilities and ensure that information given is true and accurate.

Asset Purchase

An asset purchase is where a buyer will purchase the assets of the business, including the intangible and tangible assets and the stock in trade.

When the business assets are sold, ownership of the business will change over to the buyer, who will often set up their own company to purchase the business.  Further, the trading name (which is an intangible asset) of the business will usually remain the same unless agreed otherwise.

However, unlike a share purchase, the buyer will not acquire any of the business’s liabilities and the assets are usually agreed to be free of any security interests.  Whilst employee contracts are terminated, the buyer has the option to re-hire any of the employees.

To understand which option is right for your situation, we strongly encourage you to seek legal advice before purchasing the business. Choosing the wrong option can be costly.

Claire Tyler
Commercial Lawyer