Buying or selling a business?
Jun 6, 2012 / 5:00 am
Purchasing a business is an exciting event that brings with it many challenges and opportunities. For the seller, the sale of a business can be financially rewarding. Often the transition away from the business will free up the time and resources to allow you to enjoy the fruits of your hard work and dedication.
Whether you are the buyer or the seller of a business there are many things that you need to consider as part of this process. Can you afford it? What is a fair price? Will I sell the assets or the shares of my business? Will I have to pay taxes on the sale? Does the purchase and sale contract protect my interests from a legal standpoint? In this article I will touch on taxability, and contrast the purchase and sale of business’ assets vs. the purchase and sale of shares of a business. I will also assume for discussion purposes that the business is operated through a corporation. I will discuss other considerations in a future article. My colleague Mathew Dober, will highlight the important legal aspects in a future article.
Will you pay have to pay taxes on the sale? In some instances you can profit $750,000 on the sale of your business without paying any taxes on the sale. Not a bad deal. To take advantage of this you will have to sell shares of your business. In addition the shares you are selling will have to meet other important criteria.
- In most cases, but not all, you will have had to own the shares for at least two years prior to selling your shares.
- In the 24 months prior to the sale of your shares at least 50% of assets owned by the business must be involved in an active business.
- At the time of the sale 90% of the assets owned by the business must be used in an active business carried on in Canada.
Meeting these criteria often requires planning and taking proactive steps aimed at ‘cleaning up’ the balance sheet well in advance of the sale. This preferential tax treatment is not available to corporations selling shares. If the sale of shares does not qualify for an exemption the seller will have to pay taxes on any capital gain that results from the sale.
If selling the shares of your business is not an option you may instead sell the assets of your business. These could include equipment, inventory, customer lists, and everything else required to run the business. Under this scenario the corporation will have to calculate the taxes on the sale of these assets. Once any corporate taxes have been paid, you the shareholder of the corporation, may have to pay an additional level of personal tax when you remove the sale proceeds from the corporation.
The difference between the taxes that will be paid in a share vs. asset sale will often dictate the price the seller will be willing to sell at under a given scenario.
From a buyer's perspective purchasing the shares of a company can mean taking on added business and legal risks that need to be considered. The buyer will normally be provided greater tax incentives in the form of depreciation when purchasing assets of a business. This relative advantage may mean a buyer is willing to pay slightly more for the assets of a company when compared to purchasing the shares. This increase in price may offset the additional taxes a seller might incur on an asset sale. It is important to remember that every seller and buyer is different and each have unique circumstances that make every purchase and sale transaction unique. Your accountant can help you work through these issues and determine how much taxes will be payable on a share sale versus an asset sale.
The items considered above are only some of the factors that need to be considered. Getting accurate and professional advice well in advance of the transaction is crucial to ensuring you get the best deal and your interests are protected. If you are thinking about buying or selling a business it is never too early to start discussing the idea with your team of professionals.
Read more Focus on Business articles
- Incorporated business & tax rates Aug 25
- Buying a business: Assets vs. Shares Jul 13
- Buying or selling a business? Jun 6
(Click for RSS instructions.)