Buying a Business

There are, generally speaking, three ways to buy a business; you can buy all the assets of the business; you can buy the shares of the corporation that owns the assets used in the business; or you can amalgamate a corporation which you already own with the one that operates the business. Each method has advantages and disadvantages, and the decision about which technique to use is ordinarily based on business, tax, and legal considerations. Once a decision has been made about how the business is to be purchased, a written agreement is made.

In the case where the assets of the business are to be purchased, the agreement refers to a number of things such as:

  • The purchase price
  • The assets that are to be purchased and the values allocated to certain classes of assets
  • A mechanism for adjusting the purchase price once final financial statements become available
  • Conditions that have to be satisfied ensuring that the seller is able to transfer title to the assets free of claims by the creditors
  • Whether the purchaser is to assume any liabilities
  • Where the assets are used in a business that operates out of rented premises
  • Whether the purchaser will obtain a new lease, a sublease or an assignment of an existing lease, and who is responsible for the costs associated with a transfer of a lease
  • Where the business is operated under a franchise, whether the purchaser is to assume the existing franchise agreement, and who pays any costs associated with a transfer of the franchise
  • Whether the employees of the business are to be employed by the purchaser after the business is bought, and how benefit plans and pensions are to be handled

In the case where the shares of the business are to be purchased, the purchaser takes all the assets and all the liabilities of the business, but the agreement still needs to refer to many of the same things as in the previous example. The agreement will also address:

  • How the shares are to be transferred
  • How control over the business is to be adjusted once final financial statements become available
  • Whether the purchase price is to be adjusted once final financial statements become available
  • Conditions that have to be satisfied, such as the buyer being able to examine and be satisfied with any contracts that exist between the company and its suppliers, as well as any franchise agreement or lease

Even where one buys a relatively small business it may be worthwhile to obtain advice from an accountant and a lawyer about how the purchase should proceed. There may be traps for the unwary and opportunities to minimize taxes.


Incorporation

There are several reason for incorporating a company. The decision whether to incorporate is usually driven by income tax considerations and by the cost entailed in incorporating a company. There are some other factors that should be considered when deciding whether to incorporate. Some of these include:

Limited liability: A corporation is a legal entity that is separate and distinct from its shareholders. It is the corporation that owns and operates the business and incurs the liabilities that relate to the business. Protecting one’s assets from the claims of creditors is a good thing for people who operate a business. Operating a business can be risky and using a corporation to conduct the business means that one risks only those assets that are put into the corporation rather than all of one’s assets. Having to provide personal guarantees to creditors negates the advantages of limited liability.

Perpetual succession: A proprietorship or partnership ends when a proprietor or partner dies. That can have adverse consequences, particularly from a tax standpoint. Corporations do not die with their shareholders; this means that planning can be done to ensure that incorporated businesses continue after their founders have died.

Estate Planning: Related to the notion of perpetual succession is the fact that the share capital of a corporation can be structured so that shareholders can transfer some of their assets to their children during their lifetime or at their death. A well designed share structure allows one to maintain control over one’s business while allowing some or all of the growth of the company to be passed to successive generations. It also permits income taxes and capital gains taxes to be minimized, or at least deferred.

Profit sharing: It is generally easier to implement a profit sharing plan where there is a corporated vehicle. Employees can be given shares in profits without the management powers and responsibilities that are accorded to partners.