Agreement to Purchase a Business
An agreement to purchase a business should be carefully drafted, and reviewed with your financial adviser, accountant, and lawyer before signing. There are many important decisions, in addition to the decision of what price to offer, when to close the deal, and how to arrange financing.
There are two ways of buying a business: buying all the assets of the business, or buying all the shares 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 GST 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 $500,000 capital gains exemption, because up to $500,000 of the gain arising on the sale of shares may be entirely exempt from tax.
In order 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 5 business days.