BARRISTON BRIEFS: Buying Shares
In the new series, Barriston Briefs, Joanne McPhail talks about buying shares:
I have a client who sent me a Letter of Intent that she has received for the purchase of her business. It struck me, as I was reading through it, that the potential purchaser did not understand the ramifications of his own offer. He started out offering to buy all of the shares of the corporation that my client owns. But the body of the offer looked more like an asset purchase. He did not want to assume any liabilities of the business and he seemed to want to pick and choose which employees stayed on and have my client fire the rest and be responsible for severance packages, without regard to cost.
Usually when you purchase all of the shares of a company, you inherit the liabilities and the ongoing business operations (including employees). The corporation is a separate legal entity and it stays the same, regardless of who the shareholders are behind it. The upside is the purchaser can have a seamless transition where no one even has to necessarily know that ownership of the company has changed, the downside is that, with the company, comes its history, its liabilities, and any skeletons in the closet. There are tax ramifications depending upon which transaction is chosen, and this often impacts price. Knowing the difference between a share purchase and an asset purchase and assessing the pros and cons of each before making your offer, makes good business sense.