Overview of Purchase and Sale of a Business
The process of building a business from scratch can be complex and time-consuming, prompting many to opt for purchasing an existing business with an established customer base. Likewise, business owners who have successfully grown their ventures may decide to sell, either to explore new business opportunities or to reap the rewards of their efforts.
The purchase and sale of a business can be a complicated process, intersecting financial, real estate, and tax considerations. At MBLAW, our clients benefit from our years of experience and meticulous attention to detail, assets that are vital when navigating the complexities of acquiring or selling a business.
When contemplating a business asset purchase or sale, there are several crucial factors the prospective buyer or seller should consider. One of the most important steps is due diligence – the thorough examination of the business to ensure you’re receiving exactly what you’ve bargained for.
During the due diligence process, your lawyer will conduct the necessary searches to ensure that the assets you’re acquiring are free from any liens or encumbrances. Trust MBLAW to be your steadfast partner in the rewarding journey of buying or selling a business.
Types of Business Acquisition Deals
Acquiring an existing business can be accomplished through two primary avenues. Each route has its unique characteristics and implications, and the choice between the two often depends on the specific circumstances of the deal.
Navigating the complexities of these deals requires comprehensive legal knowledge and experience. At MBLAW, we are committed to providing our clients with the necessary guidance and expertise to make informed decisions when buying or selling a business.
In this type of deal, the buyer acquires all or a substantial portion of the business’s assets. This could include physical assets like equipment and inventory, as well as intangible assets such as goodwill, trademarks, and client lists. Opting for an asset purchase allows buyers to pick and choose the specific assets they want, which may provide them with greater control over what they are acquiring.
In a share purchase deal, the buyer acquires all the issued and outstanding shares of a business. This means the buyer essentially steps into the shoes of the previous owner, taking over the entire business including its assets and liabilities. This type of deal may be beneficial for buyers who wish to maintain business continuity and for sellers who want to completely exit the business.
Purchase and Sale of a Business Process
Let the seasoned team at MBLAW guide you every step of the way, providing clear explanations and thorough due diligence to help you navigate the process confidently.
01.
Preparing the Letter of Intent
Prior to signing the agreement of purchase and sale, the involved parties usually draft a letter of intent to negotiate, which outlines the primary terms of the deal. If you have a draft letter of intent or agreement, please contact us so we can assist with the inclusion of specific clauses to ensure your legal protection.
02.
Form Submission and Document Request
Fill in our contact form, and upon confirmation that we can meet the necessary deadlines, please provide us with the requested documents.
03.
Agreement Discussion and Due Diligence Commencement
A lawyer will arrange an appointment with you to discuss the agreement or letter of intent and initiate the due diligence process. This procedure ensures that you fully understand the intricacies of the deal and that all assets involved are as represented.
04.
Document Signing
Once the agreement is finalized and the due diligence process is completed, another meeting will be scheduled. During this meeting, you will sign the necessary transfer documents to proceed with the transaction.
05.
Business Transfer
The final step involves the exchange of documents and funds. Once this exchange is completed, the business is legally transferred.
Purchase and Sale of a Business: Frequently Asked Questions
The allocation of the purchase price between assets and goodwill depends on the buyer’s and seller’s respective tax strategies. Buyers often prefer to allocate more to inventory or depreciable property to reduce future taxable income. On the other hand, sellers may prefer less allocation to inventory and minimize capital cost allowance recapture on depreciable property.
A Canadian-controlled private corporation must meet specific criteria to qualify as a QSBC (Qualified Small Business Corporation) share. Firstly, at the sale time, 90% or more of the corporation’s assets’ fair market value must be actively used primarily in Canada. Secondly, for the 24 months before the sale, more than 50% of the corporation’s assets’ fair market value must have been used principally in an active business primarily in Canada. Finally, the shares should not have been owned by anyone other than the individual seller or a related person or partnership in the 24 months before the sale.
Purchasing a business through an asset purchase can reduce the buyer’s liability. Once all asset-related searches come back clear, the buyer can be assured that past liabilities will remain with the seller. There might also be tax advantages as the buyer could leverage depreciation of assets and amortization credits. However, it’s essential for the buyer to discuss these options with their financial advisor as part of their due diligence process.
In a share purchase, the buyer takes on all of the company’s assets and liabilities, which can lead to increased risk. Due to this heightened risk, share purchases often come at a lower cost. Both parties should seek tax and financial advice when choosing between a share and an asset purchase.
To safeguard your interests when buying a business, it’s crucial to have your purchase and sale agreement subject to due diligence. Engage a reliable lawyer to carry out thorough due diligence and advise you on the findings. Knowledge of legal risks helps you make an informed decision about the purchase. It’s also advisable to consult a tax consultant or a financial advisor during the purchase process.