Does a newco structure protect the seller as much as it protects me?

A buyer may set up a new company, a newco, to make the purchase. The newco owns the business or its assets, and the buyer owns the newco. That arrangement is built around the buyer’s exposure, so you should not assume it gives the seller the same comfort. Ask what stands behind the newco’s promises.

What the newco does for you

Nova Scotia’s government describes a company as a legal entity separate from its owners. Under s.45(1) of the Canada Business Corporations Act, the shareholders of a corporation are not, as shareholders, liable for any liability, act or default of the corporation, except under the subsections the section lists. If the newco is provincially incorporated, check that province’s statute.

Where that leaves the seller

If the price is paid in full at closing, the seller has less to worry about. If part of it is owed later, through vendor financing or an earn-out, which BDC describes as ways a seller stays involved, the debt belongs to the newco. Ask what the newco will hold beyond the business it just bought. The seller may also be asked for an indemnity, which BDC describes as a promise to be responsible for unforeseen liabilities for a period after the sale, so protection may run in one direction.

What to expect and what to ask

• a request that you personally guarantee the newco’s obligations, which is a decision to make with your lawyer rather than a formality
• a request for security over the business’s assets for any unpaid balance
• questions about what the newco will own, and whether your lender will take security over the same assets
• a Personal Property Security Registry search, which BDC tells buyers to run to find liens on the assets they are buying

For how the structure choice changes what a buyer takes on, see asset sale vs share sale. For the seller’s security on a deferred balance, see how do I release vendor take-back security once the note is paid.