Buying a Business? Consider these issues.

Buying a business can be an exciting time.  You’ve found something you believe will be a good investment and generate positive cash flow for years to come.  Before signing on that dotted line, however, have you considered these factors:

  1. Why is the vendor selling?  Are they retiring or seeking a new venture; or are they concerned that the growth prospects or market for the business is under pressure and they wish to cash out before things get bad?  It is critical to assess the vendor’s motivation to determine if the prospects for the business are as bright as you think they are.  No one knows the business better than the current owner, and if they are choosing to sell then there must be a reason.
  2. Are you buying assets or shares in the business (applies to incorporated businesses only)?  It is generally preferable as a buyer to purchase the assets without the related company.  This allows you to obtain the current market value of the assets for claiming your future Capital Cost Allowance and thus lower your taxes.  It will also protect you from any hidden liabilities that the vendor’s company may be exposed to, because when you buy the shares of the company, you take all the liabilities as well, whether you know about them or not.  Most vendors, however, will prefer to sell their shares to capitalize on their available Capital Gains exemption and thus earn a tax-free capital gain on the sale.  Generally you can negotiate a middle ground and buy the shares for a lesser value to compensate you for the lost “tax shield” on the assets.  In addition you will need to have your lawyer draft an indemnity agreement that will protect you from any hidden liabilities in the company (outstanding litigation, environmental liabilities etc…).
  3. How much time did the former owner put into the business?  If they worked 12 hours a day, seven days a week, are you prepared to put this time in?  If not, you may have to hire additional help, and the business may be less profitable than it appears on its face.
  4. Will the customers of the business follow you?  If the type of business you buy consists of customers that may have been loyal to the previous owner, but may or may not be loyal to new ownership, consider scheduled payments tied to sales and retention of the customer base.  This will provide some comfort as a buyer and will provide an important incentive for the vendor to work with the customers (and you) to encourage their continuing loyalty.
  5. Financing of the purchase may be facilitated by the vendor agreeing to take back some debt.  This allows the vendor to claim a reserve on the gain from the sale and spread their taxable income from the deal over a number of years, achieving significant tax savings for them.

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Disclaimer

Information contained within this blog or on this website, either expressly or by reference, does not constitute professional advice and is designed strictly for general information purposes. As individual circumstances vary widely anyone seeking assistance with either their accounting or tax situation are strongly encouraged to seek appropriate professional advice.

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