Where are certain times when buying a business that it makes sense to purchase the assets of the business rather than the shares. The most obvious case is when the business being sold has not been incorporated and is operating as either a sole trader or a partnership. Another example is when you wish to purchase less than all of a company’s business, from an entire division to a single store. There may also be cases where you wish to specifically exclude, if possible, certain known liabilities from the purchase.

In many respects, buying the assets and liabilities of an ongoing business is much the same as buying a company’s shares. The due diligence process is almost identical and an Asset Purchase Agreement or Business Purchase Agreement will contain many of the same terms as a Share Purchase Agreement. But there are certain issues that must be attended to that are unique to asset sales.

For example, in the legal due diligence process particular care needs to be made to identify contracts of the seller that cannot be assigned to another company without the consent of the third party. In addition, it will be critical to identify all of the assets necessary to run the business you are purchasing and list them in the Asset Purchase Agreement or Business Purchase Agreement to ensure that they are transferred as part of the deal.

Financial due diligence can also be more complicated in certain asset purchase transactions. Sole traders and partnerships are not required to file audited annual returns the same as companies, so the selling company’s financial statements may be less complete and less reliable than that of a company. In fact, if purchasing less than all of the assets of a company, financial statements for that particular section of the business may not be available at all. As a result, pro forma financial statements may have to be prepared in order to value the business being acquired. It will also have to be carefully assessed how the business being acquired will be accounted for after the purchase.

These issues will make certain sections of the Asset/Business Purchase Agreement critical. If all of the assets and liabilities of the seller’s business are not being transferred, or if the seller is not a company at all, then the assets being acquired must be specifically listed and transferred or assigned to the buyer, and those not being acquired should be listed as well.

Just as importantly, the liabilities to be excluded must be identified, particularly if the seller will continue as a going concern after the deal. As a buyer, you won’t want any of the seller’s tax liabilities, litigation and past employee obligations following the assets to your doorstep. This is more difficult to accomplish if you are buying all of the seller’s assets, because in that case the law may require you to assume all of the liabilities related to the business, regardless of what the agreement says, and it may even require you to take on the existing employees. In any event, the indemnification provisions in the Asset Purchase Agreement should cover all excluded liabilities. That way, at least if the buyer is required to pay for an excluded liability, it has an indemnification claim against the seller.

The representations and warranties in the Asset/Business Purchase Agreement also take on added importance, because the seller must guarantee that it has title and ownership of all tangible assets and intellectual property being transferred, and has also obtained the consent necessary to assign all licenses necessary to operate the business being acquired. Similarly, the covenants and closing conditions will have provisions specific to an asset purchase. For example, if key employees are to come along with the deal, the buyer may require each to enter into employment and noncompetition agreements before being obligated to close.

The closing of an asset purchase will also take place in a manner similar to that of a share purchase, again with certain exceptions. The board of directors of each company will certainly have to approve the transaction, with resolutions to that effect being adopted, signed and delivered. However, whether shareholder approval from either company will be required depends on circumstances.

For example, the buyer may not require shareholder approval for a cash purchase of assets, while it may require shareholder approval if shares are to be issued in the transaction. The seller may not require shareholder approval for the sale of a division of its business, but may require shareholder approval for the sale of substantially all of its assets. In every asset purchase and sale, the Memorandum and Articles of Association of each company, as well as any existing shareholder agreements, should be consulted to determine what approvals are required.

At the closing, the buyer will normally deliver the cash purchase price to an escrow fund and, if it is issuing shares to the seller, have signed share certificates ready for delivery. The seller will deliver signed copies of all necessary title transfer documents, waivers, consents and regulatory approvals, as well as all business records pertaining to the acquired assets.

When all of these documents are in order, the funds will be released from escrow and the buyer will own a new business.