Buying a business part 1
By AdvocateDaily.com Staff
In part one of a two-part series on buying a business, Edmonton corporate lawyer Kirk Goodman discusses what's important to consider before inking the deal.
To help prospective purchasers navigate the complex process, Goodman, principal of KGPC LLP, highlights the three main factors they need to consider before signing on the dotted line.
Assessment and valuation
Once they’ve set their sights on a target business, buyers need to get a handle on its value before submitting an offer.
“There are a number of hard and soft factors that you will want to look at, but I think engaging a lawyer at an early stage is going to be helpful,” Goodman says.
He explains that the company's assets fall into two large buckets: tangible and intangible.
Tangible assets include buildings and cash holdings, which can be determined via financial statements. Intangibles include intellectual property and goodwill, says Goodman.
“Your legal advisor can assist you in identifying what’s what, and your counsel should also work with you to get a professional valuation done,” he says.
Structuring the deal
In addition to a lawyer, buyers will often want to engage other professionals, such as an accountant, for help when it comes to structuring the purchase.
Wherever the business operates in Canada, and whatever the industry, Goodman says buyers have two main options: an asset purchase, which allows buyers to pick and choose what they want from the seller, or a share transaction that sees the whole company change hands.
“There are strengths and weaknesses for each, including tax implications, which accountants can advise on,” he says.
Buyers will typically favour an asset purchase, due to potential tax efficiencies and to avoid taking on the vendors’ liabilities, says Goodman.
Sellers, by contrast, often prefer a share purchase, due to the potential capital gains tax advantages associated with such a structure, he says.
“Having a lawyer to assist with advice and negotiation is very important because of these competing interests.”
The agreement of purchase and sale for each deal will be different depending on the structure chosen, but Goodman says many risk-sensitive buyers typically proceed by first submitting a letter of intent that sets out the framework for the transaction and key points, including the price.
“The important part is that it doesn’t mean the deal will definitely happen. It’s essentially an agreement on some fundamental terms, with conditions,” he says. “It gives some exclusivity to the potential buyer while protecting them in case they can’t secure financing or are unable to complete the deal for some other reason.”
Stay tuned for part two, where Goodman will discuss the options for structuring your new business.