Finance

Finance

I try to price business sales based on the Assets plus Goodwill. Goodwill is valued based on the value of future earnings.

The Buyer must be prepared to pay the price at reasonable interest rates.

I usually suggest that a Buyer consider a three way split:

                                                1/3 Business loan

                                                1/3 Vendor-take-back note

                                                1/3 Buyer Investment

i.e. Purchase Price $150,000

                                                                                                                                                                                                Payment

Vendor – take – back 6% 5 year note. $50,000 $966.64

Business Loan 10% loan over 5 + 5 years. $50,000     $660.75

Buyer down payment                                      $50,000         -           

                                                 Monthly Payments

Asset v Share Sale

Share Sale :

1) A share sale may qualify for a $750,000 lifetime tax exemption of a capital gain tax on the sale of the shares of a Small Business Corporation. A Small Business Corporation must be a Canadian Controlled Private Corporation where most of the assets are used in an active business carried on mostly in Canada . I suggest that you consult with your lawyer or accountant to make sure that your business qualifies.

2) The exemption only qualifies when shares are sold.

3) The shares must have been owned by the Seller(s) for at least two years.

4) The Seller will want to clean up the Balance Sheet before closing the sale.

5) Assets will be transferred at book value. Any value in excess of book value will be taxed as “recaptured depreciation”.

6) Remember that the Buyer ends up with owning the Corporation with all the liabilities and any hidden risks contained. However, the Buyer also benefits from the history of the business including all contacts. Lease agreements and supplier credit history tend to flow through to the new owner. The Buyer must have Lawyer draft protection clauses in the final buy/sell agreement.

7) Buyer will inherit any retained earnings on the books, available for future dividends at reduced income tax rates.

                                 Asset Sale:

1) The Buyer buys the Assets, including Goodwill, from the Selling Corporation, free and clear with no risks attached.

2) Values of itemized assets will be used to start Capital Cost depreciation tax allowance by the Buyer. Any gain on the sale of assets will be taxed as“recaptured depreciation” by the Seller Corporation.

3) The Bulk Sales Act (Ontario) requires that all trade creditors be paid on closing when the

majority of the assets are sold in bulk. The closing lawyer may require that adequate funds be held in trust and distributed to all creditors. Arrangements can also be made with certain creditors in writing.

See www.blakes.com for more details.   

“Buyers like to buy Assets. Sellers like to sell Shares”