Hidden Hazards of Buying/Selling a Business

Agreement of Purchase and Sale for a business is a contract between Vendor and Purchaser that contains a description of property that is being sold/purchased, costs and other details of closed deal.
In most scenarios an accountant or business evaluator is required to do value of the deal, in order to provide information about profit and losses over the last few year, business assets, as well as goodwill of the company.
In case the matter of discussion is a purchase/sale of a corporation, Agreement should clarify if it is a purchase/sale of assets or shares of the company.

If you are buying/selling assets:

assets_sharesLiabilities: Purchasing assets is giving a Purchaser a privilege to choose which assets he/she is willing to obtain and which one to leave behind. In case Purchaser refuses to obtain any liabilities (for example: existing debt or pending lawsuit) they remain in Vendors possession. Nevertheless, environmental pollution fee and rights of employees and union are protected when the business is sold or transferred, which means these reliabilities are inherited with a purchase.

Employee: When company’s assets are bought, it is a common practice that employees are offered a new contract that reserves current contract’s conditions including prior achievements of each worker. However, by the law, non-union employees transfer is not a mandatory.

Documentation: An asset sale requires a complex transfer of all existing documentation, such as equipment, vehicles, leases, contracts, real property, permits and licenses, intellectual property, etc. In addition, many licenses are issued to a company name and are not transferable with a purchase, which means that this documentation has to be obtained by the new owner. Process of securing right certification is usually is expensive and time-consuming, and requires a professional advice.

Taxes: Selling assets may result in a larger tax liability for the Vendor, which is why they usually ask for a price that will allow minimizing the recapture of capital cost allowance previously deducted on depreciable property. On the other hand, the Purchaser will want to assign as much money as possible to depreciable property and inventory in order to minimize taxable income. That is why an Agreement of Purchase and Sale must indicate the allocation of the price and both, Vendor and Purchaser, must file in their tax statement in consistence with that allocation.

If you are buying/selling shares:

Liabilities: In case you are buying shares, you have to keep in mind, that you are buying a corporation as whole, which includes the assets and all ongoing liabilities of the company. In other words, existing debts and indemnifications become property of new owner.

Employees: Employees of the company are also considered as the part of the corporation, therefore, all workers remain employed by the company, unless previous owner chooses to dismiss certain employees and pays severance pay before closing. Although, a new owner reserves the rights to terminate certain employees such senior executives.

Documentation: Documentation transfer process in case of shares sale is much less complicated. You must transfer the shares of the company itself, which will already include all the assets of the company (leases, contracts, property, etc.).

Taxes: This stage has a variety of scenarios, as Vendor and Purchaser may customize terms of transactions, and negotiate actions regarding carryforwards and responsibilities for paying non-taxable inter-company dividends. Share sales are considered company revenue and a capital gain in excess of cost base are taxed, meaning only 50% is included as income. For example, if your business qualifies under small business corporation (QSBC), a Vendor may receive up to $800,000 lifetime capital gains tax-free.

Overall, consequences associated with purchase/sale of shares are complicated and often require attention of professional accountants and lawyers.

This article was provided to you by MLK Law. If you are considering buying or selling share or assets, contact us, we are at your disposal to grant you any legal advice.

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