Change of Business Ownership: Types and Reasons

In the business landscape, changes are inevitable. Markets shift, opportunities arise, and sometimes, the very structure of a business needs to adapt.

One of the most significant transformations a business can undergo is a change of ownership structure. This is a situation where ownership is transferred from one person (or group) to another.

This could happen through a merger, where two businesses join forces; an acquisition, where one company takes over another; or even the sale of a sole proprietorship to a new owner.

Regardless of the route taken, such a transition is far more than a handshake deal. It comes with a range of legal considerations that, if ignored, could cause major problems down the line.

Before diving into those legal aspects, let’s set the stage by understanding what change of ownership means and why businesses go through it in the first place.

Understanding Change of Business Ownership Structure

At its core, a change of business ownership structure involves transferring the legal rights, responsibilities, and control of a business from one party to another. This can occur in different forms:

1. Sale of business assets

This is when a buyer purchases the business’s physical and intellectual property but not the legal entity itself.

A sale of business assets happens when the buyer acquires selected assets of the business such as machinery, vehicles, stock, furniture, trademarks, patents, and even customer lists without taking over the company’s legal identity.

In this arrangement, the original legal entity (the seller) still exists, but it no longer owns the sold assets.

Let’s take this example for better understanding. If a printing press is struggling financially, it might sell its printing machines, computers, and brand name to another printing company.

The buyer gets those assets but does not inherit the seller’s debts, ongoing contracts, or corporate obligations unless specifically agreed upon.

2. Share purchase

In this case, the buyer acquires ownership by purchasing shares in the company, effectively stepping into the shoes of the previous owners.

In other words, in a share purchase, the buyer acquires the company by buying some or all of its shares from the existing shareholders.

This means the buyer takes ownership of the company as it is, including its assets, liabilities, contracts, and ongoing obligations.

If Mr. Ahmad, who is an investor, buys 100% of the shares of a catering company; he now controls the company’s operations, owns its assets, and inherits all its debts and commitments.

3. Mergers and acquisitions

M&A are a little different from the others. M&A allows businesses to combine or one absorbs the other, often with the aim to expand market reach or gain new capabilities.

In a merger, both businesses join to form a new entity or one survives while the other ceases to exist. In an acquisition, one company buys and takes control of another.

A regional bank for one, might acquire a smaller local bank to increase its customer base and expand into new areas. Or, two tech firms might merge to pool resources and compete better with bigger players.

4. Succession transfers

Succession transfers occur when ownership passes to family members, business partners, or designated successors.

This is often in family-run or closely-held businesses. This could happen due to retirement, death, or a planned exit strategy.

Each form carries its own set of legal implications, which must be carefully navigated to avoid disputes, liabilities, or regulatory penalties.

Why Do Businesses Change Ownership?

The reasons for changing ownership vary, and understanding them helps explain why legal planning is so important. Common drivers include:

1. Retirement or Exit Strategy

Business owners often reach a point where they wish to retire or pursue other ventures.

Selling the business, whether to an outside buyer, a family member, or an existing employee, allows them to cash out and move on.

2. Growth and Expansion

Mergers or acquisitions can open doors to new markets, customer bases, or technologies that would take years to develop independently.

3. Financial Challenges

If a business is struggling financially, selling or merging can be a lifeline, providing new capital and management expertise.

4. Strategic Realignment

Sometimes, a business changes ownership to align with new strategic goals, such as shifting into a different industry or consolidating operations.

5. Succession in Family Businesses

Passing a business to the next generation often involves legal restructuring to ensure a smooth and dispute-free transition.

While these reasons may seem straightforward, the actual process of changing ownership is complex, especially from a legal standpoint.

Moreover, behind every change of business ownership change lies a web of legal requirements, from contract reviews and tax implications to regulatory approvals. Overlooking these can lead to costly disputes or even jeopardise the transaction.

That’s why in our next blog post, we’ll focus entirely on the legal considerations of changing business ownership structure.