Buying a business can be an exciting adventure. It can also be an intimidating process because there’s so much to consider: financing the purchase, marketing and growing your new business, retaining customers, transitioning employees, etc. How do you balance all these factors while striving for and achieving financial success?
There are practical, economic, legal and tax considerations to buying a business. I want to provide you with some information so you can plan, carry out and protect your investment. It’s important to remember, negotiating and planning the transaction up front can save you time, money and stress down the road.
There are 2 ways to buy a business: (1) purchase the shares of the company or (2) purchase the assets of the company. Both types of transactions have advantages and disadvantages for the Vendor and Purchaser. Both types of transactions have different tax consequences for the Vendor and Purchaser. The circumstances surrounding your purchase and the nature of the business you are buying will impact the structure of the deal. This article is part 1 of a 3-part series on buying a business. In Part 1 I discuss buying a business by way of shares.
If the Vendor is an incorporated company, you may decide to purchase all (or the majority) of the shares of the corporation. If the Vendor is a partnership or sole proprietorship, this option is not for you. The shares represent the value of the corporation. As a result, it is important to carefully review the financial status of the corporation before deciding on a purchase price. I recommend meeting with your accountant to complete this review.
You may find a Vendor to be more favourable to a purchase of shares because he may be able to limit his tax consequences. If certain requirements are met, a Capital Gains Deduction (CGD) may be available to a Vendor who sells shares in a Qualifying Small Business Corporation. By using his CGD, the Vendor will pay significantly less tax on the transaction.
Sometimes a purchase of shares isn’t as advantageous to the Purchaser. This is because the Purchaser buys the whole business – the assets and the liabilities of the corporation. Some common liabilities include tax and legal liabilities, employment contracts and WCB accounts. Ultimately, the Purchaser buys the whole business and its history, the good and the bad. There is also a risk that certain liabilities are unknown or unforeseeable at the time of the transaction. However, a Vendor may be willing to negotiate a lower purchase price in exchange for the Purchaser agreeing to a purchase of shares. It may be worth exploring this option.
If you are interested in purchasing the shares of a corporation, there are precautions and due diligence measures to minimize your risk and liability. These measures will be discussed in next month’s legal brief. Whether you buy a business by way of shares or assets, consult with your lawyer and accountant to explore your options and structure the best possible deal. Be sure to check back in next month for Part 2.