So You Want to Sell your Business?

By David Smith, Partner

In my years of practicing business law, I have often advised clients who had agreed to sell their business and had even agreed on a sale price. Both the client and the buyer thought it would not be unreasonable for the lawyers to be able to paper the sale in a week, or two at most.  The buyer could be a key employee, supplier or competitor.  Lets just “git 'r done” they instruct me.

Not so fast.  A first major decision, and one which is often overlooked, is whether the sale is to be a sale of shares, or a sale of assets, or some combination of them.  The seller cares because he or she may be able to utilize a personal capital gains tax exemption and save up to $350,000 in tax.  Furthermore, the company will be owned by the buyer.  All employees, contracts, etc. go with it.  No HST or Land Transfer Tax - nice and tidy.

However the buyer will normally prefer to purchase assets.  Although there may be Land Transfer Tax payable if land is involved, that is worth the cost as the buyer does not then assume product warranties, employee issues or any adverse “past history” that may be lurking below the surface in the Company – such as CRA corporate tax re-assessments.  A buyer may agree to purchase shares where it is satisfied that the Company is generally clean and it can capture business losses to be used against profits.  This “shares” vs. “assets” issue commonly results in a further negotiation of the price, and also the inclusion of holdbacks or seller debt in order to guarantee the buyer it is getting what it bargained for.

The message – make sure you have sound accounting, tax and legal advice in structuring the transaction from the outset.

Allocating the Purchase Price

Posted by Joanne McPhail, Partner and Certified Specialist in Corporate/Commercial Law

If you are selling all or substantially all of the assets of your business, or if you are buying the assets of a business, you will certainly have to come up with a purchase price that both sides can agree upon. However, the negotiating with respect to the purchase price should not stop there. The parties should be making an agreed-upon determination of how that price is allocated amongst the various types of assets. For instance, what is being paid for the goodwill or client list of the business verses the depreciated assets verses the leasehold improvements? It can make quite a difference to both sides, in terms of the tax consequences, and often the buyer and seller have opposite preferences. So the actual price can be influenced by how that price is allocated. Buyers will be more likely to pay more up front, for instance, if they can write the assets off quickly afterwards. It is important for both the buyer and the seller to consult with their lawyers and accountants with repsect to the allocation and to ensure that it is agreed upon either up front, or at the very least, prior to closing. Understanding the tax and legal implications of your decision to buy or sell at a certain price makes good business sense.