Business Brokers BC Blog

For the Seller of a business this is usually a straightforward question.  In the large majority of cases when a business is set up and reports as a limited liability corporation the owners prefer to structure the sale as a share sale as in Canada they benefit from the $750,000 lifetime capital gains exemption.  This is especially the case when ownership resides with husband and wife, or a few partners and the $ value of the transaction does not exceed the combined individual limits.  Each individual can take advantage of this very significant tax saving and in some cases will still have room to start another business in the future and take advantage of the balance of their exemption.

On the other side of the coin, the Buyer oftentimes prefers an asset purchase as it is more straightforward from a liability standpoint.  When you buy a corporation you also buy that corporation’s liabilities, which means the due diligence has to be a lot more thorough (to ensure that you are not purchasing legal or tax liabilities for example).  Secondly, there are tax advantages to the Buyer by purchasing a business structured as an asset sale.  The Buyer can depreciate those assets, which assists in reducing his future tax burden.

In some cases, however, Sellers start with the intention of selling the shares of the corporation but circumstances require or force a change of mind.  One transaction we completed last year is a good example.  This was a five year old company that was in the business of designing and (wholesale) distribution of a range of home products. The owners wanted to sell the shares.  There was a fair amount of genuine buyer interest and in the end a synergistic competitor became very interested.  What this buyer however only really wanted was the inventory and the contracts (with suppliers and distributors).  They did not want the FF&E, the forklift, shelving, inventory monitoring software, warehouse space and obligations of the lease.  They were in the business - they already had all of this.

In this case, as I was acting for both parties (as a dual agent) I proposed a change to an asset purchase.  Why?  The buyers didn’t want anything apart from the inventory, the registered name and the contracts.  The sellers in the end sold their inventory at cost (no tax burden), and apportioned part of the purchase price to goodwill.  They kept control of a corporation which had over $200,000 in retained losses.  They were able to collapse their lease, sold their FF&E privately and maintained control of a corporation that one of the owner’s sons was able to use for another business venture.

In Canada the vast majority of the transactions we are involved are structured as share sale transactions.  In the US the story is very different where transactions under $1,000,000 are nearly always carried out as asset sales.  One reason perhaps being that corporate legal liability issues are just too worrisome and too potentially burdensome below the border.

In Canada, once we bring a Buyer and Seller together and an Offer to Purchase is executed by both parties, our clients will make use of their own legal counsel to “paper” the transaction, ensuring all liabilities are dealt with properly and in an orderly manner on change of corporate ownership.  On average this legal due diligence period typically takes about three to four weeks to complete.  A lot faster than many other countries, our associates in the UK, for example, plan for an average time period of six months to conclude due diligence.

This entry was posted on Thursday, June 11th, 2009 at 10:05 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.