Legal Advice For Your Next Chapter In A New (To You) Business
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From a business operations perspective, the end result is the same. Once you transfer the business on its possession date, be it shares or assets, you become the new owner and control the business. However, from a legal and accountant perspective, these are two entirely different things.
When you buy a Manitoba business through assets you acquire them at the negotiated value. This allows you to then depreciate the assets in accordance with the Income Tax Act of Canada (ITA). The higher the value, the more you can depreciate.
This value is determined through negotiations between the buyer and the seller. Negotiations are usually handled by the purchaser and seller’s accountants who must agree on allocating the purchase price between the goodwill and equipment. The buyer wants to acquire the assets at the highest price possible because he or she will want to be able to depreciate the assets. The vendor, on the other hand, wants the value to be low or closer to the depreciated value on the books to avoid paying the taxes on the now upwardly adjusted value.
Secondly, and perhaps more importantly, when you buy the assets you don’t acquire any “skeletons in the closet.” There’s a clear break in ownership. The owner who sells the assets remains responsible for his or her own “skeletons.” Keep reading to learn more about this.
When you buy shares in Manitoba, you buy shares of the corporation that runs the business. The corporation still owns the assets, so from a legal point of view it’s business as usual for the business’ customers and suppliers.
However, the “controlling mind” behind the corporation changes. From a buyer’s point of view, an asset purchase is preferable. For two reasons:
When you buy the shares of a company, you become the owner of the company. This also means that you inherit all of the corporation’s unknown existing liabilities, to some degree. As lawyers, we do our best to allocate the risk to the appropriate party, but these protections are not absolute.
For example, if the corporation owns land and you discover an environmental problem such as unknown contaminant storage, you will inherit the problem. If you discover it within a year or two, you may be able to pursue the vendor, as the vendor will have likely provided representations and warranties that everything was fine. However, that ability is usually limited to 12 to 24 months.
With a share purchase, you acquire the assets at the already depreciated value. So from a tax point of view, you have less to write off. However, this is usually accounted for in the purchase price. All things being equal, the same business sold as an asset sale will command a higher price than by share sale, at least theoretically.
A seller usually prefers a share sale as it offers significant tax savings if done right. While an asset purchase might be better for you, the seller may insist on a share sale.
I was recently faced with an opportunity to acquire a business, however I knew I would need an absolute miracle in order to connect all the required dots in the timeframe I was allotted. I went on an online hunt for a law firm I would feel comfortable with, a firm willing and able to meet the time constraints. After countless hours on the hunt, I found myself circling back to the one firm that really had my attention. They had very helpful short videos to provide a bit of insight into different areas of incorporating, the do’s, the don’ts, etc… I decided to pick up my phone and make the call to TLR Law, and got the opportunity to speak with Philippe. I immediately felt comfortable, so I went ahead and hired the team at TLR Law Office to help me acquire my business.
Prior to becoming the owner, I had been employed with the business for nearly 24 years and was the operations manager at the time of the transaction. While I knew the business’ operations well, buying the business was a whole new experience. Philippe and his staff explained everything using clear and understandable language. They kept me informed throughout the process and found ways to overcome problems as they arose. While it was a new and challenging process, the team at TLR came through for me with time to spare. They have earned 100 per cent of my trust. I am very fortunate to have landed such a capable team.
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