Many aspiring entrepreneurs are presented with the opportunity to purchase a business, and the choice between buying shares or assets of the company can significantly impact the outcome. In this guide, we shed light on the key differences between these two options and the potential consequences of making an uninformed decision. We emphasize the importance of obtaining legal advice to navigate the intricacies of business acquisition.

Understanding Company vs. Business:

It is essential to clarify that companies and businesses are distinct entities. A company is a legal entity that can own and operate a business. In contrast, businesses can be managed by sole traders or other entities, such as charitable trusts. The choice between buying shares or assets depends on individual circumstances and the specific business in question.

Share Purchase:

A share purchase occurs when a shareholder agrees to sell part or all of their company shares to a buyer. The transaction may encompass the entire shareholding or only a portion, and it can be an outright purchase or occur incrementally over time. In a share purchase, the company remains in existence, and the business typically continues to operate under the same name. This approach often allows existing contracts with suppliers and employees to remain in place.

However, share purchases come with a potential downside for the buyer. They risk inheriting undisclosed liabilities of the company, which may lead to unexpected financial burdens. Seeking legal advice is paramount before committing to a share purchase to ensure the existence of vendor warranties that disclose all liabilities and verify the accuracy of the information provided.

Asset Purchase:

An asset purchase involves acquiring the assets of the business, including both tangible and intangible assets and the inventory. Typically, this is facilitated through an Auckland District Law Society Agreement for Sale and Purchase of a Business. In an asset purchase, ownership of the business transfers to the buyer, who often establishes a new company to facilitate the transaction. The business‘s trading name usually remains unchanged unless otherwise agreed.

Unlike share purchases, asset buyers do not assume any of the business‘s existing liabilities. Furthermore, assets are generally guaranteed to be free of security interests. While employee contracts are terminated, the purchaser has the option to rehire any employees using their newly formed company.

Seeking Legal Advice:

The choice between share purchase and asset purchase is not one to be made lightly. The consequences of selecting the wrong option can be financially burdensome. Therefore, it is strongly recommended that individuals seek legal advice before entering into a business purchase agreement. Legal counsel can provide guidance on the best approach tailored to individual circumstances, minimizing risks and ensuring a smooth transition when acquiring a business.

Purchasing a business represents an exciting opportunity for budding entrepreneurs. However, the decision to buy shares or assets of the company is a pivotal one that demands careful consideration. Seek legal advice to make an informed choice, protect your interests, and avoid unexpected liabilities that could jeopardize your investment.