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BUYING YOUR OWN BUSINESS: THINGS TO KNOW

Nov 24 2015

There are definite advantages to buying your own business: pre-existing relationships, established clientele and an assured revenue stream are just three reasons why many pursue this opportunity. But before you sign any deal, you should consider other aspects as well since these will not only affect the transaction but could also have a potentially negative and far-reaching impact on you and your business.

Before moving ahead, you must decide if you’re going to purchase the company’s assets. It sounds fairly straightforward but it’s actually more complicated than that. Are you buying actual assets (“asset deal”) or are you buying shares (“share deal”)? Here are four factors to help you make an informed decision:

  1. Consider the tax consequences: an asset deal may trigger GST and PST to be payable by the buyer whereas a share deal won’t. If the business holds an interest in land, an asset deal will require the buyer to pay Property Transfer Tax, which would be avoided in a share deal.
  2. Find out if the deal structure will affect the purchase price. From the seller’s perspective, a share deal is tax preferable because they benefit through capital gains tax treatment. They may also be able to access either a one-time capital gains exemption (valued at more than $800,000) available to small businesses or the $1,000,000 exemption for qualified farm company shares. What does this mean for you? For obvious reasons, a seller may be highly motivated to proceed via a share deal because of these financial incentives, but you – as the buyer – can use this to your advantage by negotiating a lower purchaser price.
  3. Remember what is being purchased in a share deal is very different from what is purchased in an asset deal. In a share deal, you are purchasing the entire company, which could include undisclosed liabilities, taxes owing to CRA and/or potential severance payouts to existing or exiting employees. From a buying perspective, this poses a significant financial risk. In an asset deal, as the buyer, you’re only purchasing those assets that are specifically contracted for. This means you can pick and choose the assets that you want to acquire in the transaction while leaving you less susceptible to undisclosed liabilities.
  4. Finally, keep in mind the processes that are required for each deal. In an asset deal, you only need to deal with one seller (i.e. the company). In a share deal, though, you will need to negotiate with several sellers (i.e. each shareholder). An asset deal tends to involve more paperwork while a share deal tends to involve more due diligence prior to closing. If there are minority shareholders who oppose the deal, for corporate law reasons, it will be easier to ensure the deal goes ahead if they are proceeding by way of an asset deal.

Determining the structure for the purchase of a business is an important yet often overlooked step in the process. To help lessen potential losses (both financially and personally), it’s recommended that you consult with a professional services group like RDM Lawyers who have in-depth knowledge of all tax and legal implications. In addition to helping you navigate the business transaction, they can also help ensure you are well-equipped to make a sound business decision, one that will position you for success now and in the future.

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