Agreement to Purchase a Business
An agreement to purchase a business should be carefully drafted and then reviewed with an accountant, a lawyer, and a financial adviser. There are many important decisions, in addition to the decisions regarding the price, closing dating, and financing arrangements.
There are two ways of buying a business: either buying all the assets of the business or buying all the shares of the company that owns the assets of the business.
Purchasers generally prefer an asset purchase. This is because, with a share purchase, the after-tax cost is higher and the purchaser will be subject to all of the undisclosed liabilities of the vendor’s business. But sometimes the purchaser favours a share purchase because HST and provincial sales and transfer taxes are not payable, and an asset purchase can be more complex.
Vendors generally prefer selling the shares of the business because the gain realized is a “capital gain” for income tax purposes. This is especially so where the vendor is an individual entitled to the Canadian small company capital gains exemption, because some or all of the gain arising on the sale of shares may be exempt from tax. Each Canadian is entitled to a capital gains exemption of up to $750,000 on certain small business shares, as well as on qualified farm and fishing properties.
To avoid the difficulty of valuing inventory and other items which may fluctuate, it is common to include both a closing date and a post-closing adjustment date on which the balance of a purchase price is paid after the valuation of inventory has been completed.
If you are about to purchase a business, perhaps include a clause that the agreement is subject to review by your solicitor within five business days. This will give your lawyer the time to review the documents and to provide you with advice.