Buying and Selling a Business
Buying and Selling a Business
Karen G. Shin
This article provides information only, not legal advice. If you have a legal problem or need legal advice, contact us at info@logoslaw.ca.
One of the biggest factors to consider when deciding to buy or sell a business is to first determine whether the transaction will be structured as an asset sale or a share sale. There are advantages and disadvantages to both, and the implications of each will differ between the buyer and the seller. Regardless of what you choose, this decision will have a significant impact on the immediate costs incurred as well as on the ongoing operation of the business after the completion.
If you are not sure which route to take, seeking proper legal and accounting advice is a good first step. Your legal and tax advisors will review the factors that go into the decision, and help you weigh the factors given the particularities of the transaction, business, or both.
The discussion that follows this section is NOT meant to be an exhaustive list of all such factors, but an introduction to the oft-posed question of asset vs. share transaction.
Asset Sale
On an asset sale, you would be buying the assets of the business, such as furniture, equipment, accounts receivable, inventory, and leasehold improvements.
Generally speaking, it is to the buyer's advantage to buy assets because, in an asset purchase, the buyer has the ability to choose which assets to take and which liabilities to assume.
In theory, the buyer can also negotiate the allocation of price to the specific type of assets being purchased so that the buyer establishes a beneficial cost basis. In practice, allocation of value to a particular type of asset is either highly negotiated, or not at all. This is another area where good accounting and legal advice will serve you well. Keep in mind, however, that CRA might have their own ideas about the value of any assets being purchased.
One of the biggest reason for purchasing assets rather than shares is that there is a risk factor when it comes to share acquisition. It's very difficult, if not impossible, to determine to a certainty that there aren't any hidden liabilities in an incorporated entity. The due diligence in an asset sale is generally less daunting than that of a share sale, to the extent that you can check the relevant registry to see if there are any liens, charges, or other interest affecting the title to the assets.
If the asset being purchased include land, added transaction costs such as Property Transfer Tax should also be considered.
Share Sale
One of the advantages of a share transaction is that, for better or worse, the purchaser will take the whole of the business carried on by that corporation. There might be certain valuable licences, grants, or other rights that are essential to the operation of that business. Share transaction would be the parties' only choice if such rights are not transferrable to another entity or individual.
Share sale, depending on the purchaser's comfort level with the target corporation, has the potential of being completed in a relatively simple manner. I say "the potential", because it can also be more complicated than an asset transaction by the very reason of being a share sale.
The sellers may prefer a share transaction, if they can qualify for the lifetime capital gains exemption. As is the case with most exemptions under the Income Tax Act, there are strict requirements for this exemption to apply. If the sale of shares doesn't qualify for the exemption, it might not make a difference to the seller how the business is sold.
Summary
Even after you have decided what avenue of purchase or sale to take, there are a lot of things to consider before buying or selling the business. For example: Are there any third-party consents/approvals that are required for the transaction to complete? Are there any existing liabilities that must be paid out prior to completion? Are there shareholder's loan accounts to be settled or assigned?
These are just some of the things you should be thinking about before making the decision to buy or sell. We can help you come up with the answers to these questions and help you plan the transaction in a way that will be most beneficial to you. Please don't hesitate to give us a call at 604-294-0101 to schedule a free initial consultation.