Buying or selling a business can be one of the most thrilling times in a business owner’s life. Purchasing a business can be a great way to start your business journey. Or if you are an existing business owner, it can be a great way to launch into new markets or attract a new demographic. Selling a business can be equally exciting. It can help you unlock the value you have created over the years. You may be looking to exit and start a new venture. Or get ready to enjoy some well-deserved time off.
Whether you’re a buyer or seller, both sides of the transaction profoundly impact your financial life.
Structuring a business sale or purchase
There are two primary ways private companies are bought or sold in Canada. One is through the sale of assets, and the other is through the sale of shares. Both can have operational differences in a business transaction and different tax considerations. Therefore, if you are considering a business sale or purchase transaction, taking on a holistic financial approach is of utmost importance.
As you negotiate a business sale or purchase, it is essential to consider any current and future tax implications. We’ll review the basics of asset sales, share deals, and expected tax considerations in either transaction structure. Whether you are considering buying or selling a business, it is worthwhile to do your due diligence and speak to expert tax professionals, even in the early stages.
An asset sale is the sale of a business through the assets they own. It entails a line-by-line detailing of the assets and liabilities of the company by the seller. The buyer may then go through it and cherry-pick the assets (and often related liabilities) they want to buy, and the rest will remain in the seller’s possession.
In an asset sale, the company is not being sold. The corporate structure stays intact with the original owners. Some buyers may prefer this. If buyers know precisely what they want from the business, they may choose this approach to get only what they need. For example, there may be a piece of proprietary machinery or software a buyer wants but does not want to deal with ancillary lines of business. They are not obligated to take on assets or liabilities they don’t need or want.
Mechanically, each asset and liability must be transferred to a new owner in an asset sale. Sellers often prefer to avoid this deal structure as there may be two levels of taxation – one when each asset is sold and a second when the proceeds are distributed to shareholders. An asset sale is often more complicated than a share sale. It can also be more time-consuming and expensive as a result.
Additional Considerations in an asset sale
Transfer of Liabilities
Additional due diligence must be done if any liabilities related to the assets bought and sold. For example, the lenders may have to approve the transfer to a new owner. In some cases, depending on the loan terms, the lender may reject the liability assumption or add additional covenants.
Property transfer taxes
Depending on the type of business, an asset sale can be more expensive. Real property and buildings are subject to property transfer taxes in Ontario. Typically, the buyer will pay this tax. If you are the buyer, it is essential to consider this amount when you negotiate the deal. If you are a seller, be prepared for the buyer to negotiate this point in the sale.
Purchase price allocation
The purchase price allocation is paramount in an asset sale for buyers and sellers. Buyers are looking to reduce their future tax liabilities, whereas sellers are likely looking to reduce their current tax liabilities. As a result, both buyers and sellers will have different motivations when negotiating purchase price allocation in a transaction.
The purchase price allocation in an asset sale is an essential tool to optimize your tax liability, whether you are a buyer or seller. Your accountant or lawyer can help you optimize this so you don’t receive an unintended tax bill after the sale.
Another approach to purchasing or selling a business is to sell corporation shares. This entails a transfer of ownership through the sale of shares. Effectively, the corporation stays intact. The person or corporation who owns the shares will change. The corporation will continue to hold the business’s assets and liabilities.
Sellers often prefer this approach. It makes for a cleaner transfer for them. Unlike an asset sale, they don’t have to deal with any leftover assets in the business. In addition, the sale of a business through shares is often easier to execute administratively, as there is a simple transfer of shares.
Additional considerations in a share sale
Lifetime Capital Gains Exemption
If the corporation is a Qualified Small Business Corporation (QSBC), the sale of shares allows the seller to use their lifetime capital gains exemption. This exemption is crucial to tax planning for many business owners and their families.
The rules to use the capital gains exemption can be complex and take planning in advance. If you are considering selling your business, keeping tabs on whether you and your business meet the conditions is vital. If not, part of planning for a sale can involve ensuring the requirements are met.
Business losses (non-capital losses)
There may be instances in which a buyer prefers buying company shares over cherry-picking assets. Generally, non-capital losses or business losses must be used within the same entity. As a result, a buyer may prefer to keep the corporation intact if unused business losses can be applied against future income.
Blended Approach – A Hybrid sale
Both sales via shares and assets have upsides and downsides. A blended approach may be the best solution in some cases. Buyers and sellers can structure a transaction in a way that best suits their needs using a hybrid approach. A blended approach is a more complex way to structure a transaction. But it can provide a happy medium for both buyers and sellers when optimizing their tax situation. If you are looking at buying or selling a business, it is vital to consider the transaction holistically – thinking about your personal and business finances.
CONSULT THE BUSINESS ADVISORS EDELKOORT SMETHURST CPAS LLP IN BURLINGTON FOR EXPERT ADVICE
Are you looking to buy or sell a business? Our expert team of tax professionals can help you explore various structuring options. The tax advisors and industry experts at Edelkoort Smethurst CPAs LLP can help you with all your tax planning and tax compliance for your business and personal needs. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with tax expertise, contact us online or by telephone at 905-517-2297