Asset purchase – advantage and disadvantage
With an asset purchase, the vendor needs to be conscious of recapture of tax which means that if the company has depreciated certain the pieces of equipment to $100,000.00 for example and they sell that same piece of equipment for $200,000.00, the CRA will wish to recapture the tax that it had previously allowed to depreciate. That is called a recapture.
Furthermore, in an asset purchase, the vendor retains the share of company as well as the cash in the company that has been accumulated over the years and will only be taxed on that money when the shareholders take out those funds. The purchaser of the asset will want the consent of the vendor to retain the name of the business and may want the vendor to change the name of the company to allow the purchaser the use of the name. That will be important in the case where you want to retain the same telephone number that exists at present. You will also want a consent from the vendor to allow you to continue to use the business telephone number.
The disadvantage with an asset purchase is the purchaser must pay the tax on the asset over and above the purchase price. There is also a warranty on the piece of equipment that is not transferable, the purchaser will not receive the benefit of that warranty.
Also, the legal fees have a tendency of being less on an asset purchase than on a share purchase but that depends on the circumstances.
Asset of shares – advantage and disadvantage
Often the vendor can afford to sell the business at a lower price if the transaction proceeds with the sale of the shares of the company instead of assets. On a share purchase, you assume the position of the present vendor, and accordingly, the bills remain in the name of the company and will simply continue including the income tax etc. The disadvantage of a share purchase is that if the vendor has not properly reported some income, or not paid some HST remittance, or not made the proper payroll deduction and you purchase the shares of that company, you will be responsible to pay for the same as the shareholders of the company. Furthermore, if the company has a legal proceeding that has not yet been commenced, and if you purchase the shares of the company, it will be your responsibility as the new shareholders to defend such action which is an unexpected expense.
An example of that is that the company terminated the employment of an employee, and the business is sold six months or even a year after and at the time the company is not aware that the employee is considering a claim for wrongful dismissal. The employee has two years to commence an action against the company for a wrongful dismissal. Those types of situations must be addressed in a share purchase agreement.
The legal fees on a share purchase agreement are often higher because the negotiation is quite lengthy and must attempt to resolve every eventuality.
Employment issues concerning to both an asset or share purchase
Whether you wish to proceed with an asset or a share purchase, a decision must be made as it relates to the employees. Will some employees need to be terminated and if so termination pay and severance pay must be paid by the vendor. Is there any employment contract that state what needs to be paid to those employees on termination? If not, the cost of the termination pay and severance pay is not so clear. You choose to retain the employees and you choose to terminate them at a later date, remember that at law you are considered a successor employer and you will be responsible to pay the employee both termination and severance pay based on the years of service which includes the years of service with the prior owner. If there are no employment contracts in place, you won’t know what that cost will be and it is not very comforting to be responsible for an amount that is unknown particularly when you are acquiring a new business.
For example, if we are dealing with a manager, with no employment contract, who had been working for the company for some 20 years and the employee is now in his 40’s depending on the situation, you, under common law, can be looking at paying that employee a termination pay and severance pay anywhere between 12 month’s salary to 20 month’s salary. That amount will be increased if the employee had benefits, stock option and had the usage of a vehicle etc.
In these modern times, many companies have employment contracts in place for their employees, but that does not mean that those contracts are in fact valid and enforceable. If that contract was signed after the employee commenced work and the employer did not give the employee anything additional (for example: an additional consideration which can be an additional sum of money, additional day off, additional vacation days, etc.) that contract may very well be null and void. That is why you need someone who is knowledgeable in employment law to represent you when you wish to buy or sell a business. Suzanne Desrosiers’ area of specialty includes employment law and cautiously you will have someone who can protect you in that regard.
If you need assistance with the purchase and sale of a business, contact us today at 705-268-6492.
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