Purchase and Sale.docx

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Management and Organizational Studies
Management and Organizational Studies 2276A/B
Frederick King

Purchase and Sale 3/12/2013 6:32:00 AM Purchase and Sale of a Business  You have identified a business which is attractive to you o You have a business of which you would like to sell o As a purchaser, you do some initial investigation o Then you have some decisions to make  Strategic purchases/acquisition – companies in the same industry o Vertical integration – purchasing a supplier/distributor o Horizontal integration – expanding into a new market (taking over competitors)  Financial purchases – investments o When corporations have spare cash, they purchase other promising companies that will return on their investment o Help corporations to diversify into different industries  Share purchase – the purchasing company buys the shares of another o Transaction between purchaser and shareholders  Asset purchase – the purchasing company buys the assets of another o Transaction between the two companies o Capital assets that have been depreciated below their fair market value can save the purchaser large amounts in taxes Letter of intent  Usually non-binding  May be binding in only some specific areas (confidentiality, lock-up, etc.) Searches  Usually commence after letter of intent is signed  Against corporation (and vendor if share purchase)  Corporate profile search  Certificate of status  Bankruptcy search  PPSA search  Executions Search  Relevant regulatory authorities (stock exchange, RIBO, etc.) Assets vs. Shares  First major legal decision – whether to buy/sell assets or shares  You can acquire some or all of the assets of the business - make an offer to the corporation  You can acquire shares of the company that owns the business - make an offer to shareholders  Asset purchases: o Advantages of asset purchase – can cherry pick assets, no assumed liabilities, maximize CCA deductions, less due diligence o Disadvantages of asset purchase – must convey each asset, bulk sales act compliance, third party consents required, HST on assets  Share purchases: o Advantages of share purchase – capital gains exemption for seller, simplicity, no cherry picking of assets by purchaser, no bulk sales act, limited third party consents required, no HST on shares o Disadvantages of share purchase – acquire all liabilities (known and unknown), absolute and contingent, more due diligence, must acquire all assets (indirectly)  Purchasers typically want to buy assets  Vendors typically want to sell shares o If the company is a Canadian controlled private corporation (CCPC), each shareholder gets a $750,000 capital gains exemption, they can earn that much and pay no taxes on it o If assets are valued below their fair market value and sold, then a recapture occurs and they would have to incur the amount they’ve already depreciated – why they'd prefer to sell shares  Due diligence – investigating what you're buying (doing your research) o Essentially a defence to negligence – obligation to be duly diligent o If an officer acted with due diligence when purchasing a corporation that turned out to fail, they aren’t liable for negligence Payment of Purchase Price  All cash  Cash and promise to pay balance  Cash and promise to pay with adjustments (mechanism, formula, etc.)  Shares or shares and some combination as above  If there is a promise to pay, must agree on – interest, payments, adjustments, security, guarantees, remedies on default Tax Considerations  Allocation of purchase price in asset purchase - very important  Check whether you need to pay/collect HST Inventories  Changes daily, may be obsolete or unsalable o Vendor – will generally want it at 0 at the date of sale because they're getting paid the same regardless o Usually business is conducted how it normally would be up until the day of deal closing and that’s when its valued  How to value – physical count, audit, etc.  How to pay – adjustments, holdbacks, etc. Accounts Receivable  Also changes daily  How to value?  Who is in the best position to collect?  How to pay – purchaser buys at discount (with or without recourse), vendor retains  Income tax issues and elections Land and buildings  Lawyer must do searches and confirm good title, zoning, no easements, encroachments, rights of way, etc.  Environmental issues – very important o If one company buys land that is in poor condition, they take on all the responsibilities  What representations? What indemnities? How is it funded?  Zoning issues – can property be used to carry on business? o Whether or not the land be used for the intended purpose o More often than not people used land for a different purpose and nobody notices until it comes time for a transaction Intellectual Property  Business names, trademarks, licenses, copyrights, patents and even phone numbers may require special consideration  Due diligence  The property must be properly identified, confirmed to be owned by vendor, and in an asset purchase must be effectively transferred to purchaser Assumed Liabilities  In share purchase – they stay with the company  In asset purchase – must be specifically identified  In asset purchase, the amount of assumed liabilities becomes part of the purchase price o Doesn’t release the vendor unless a release is obtained  May include – accounts payable, sales orders, loans, warranty claims Product Warranties and Product Liability  Assumed liabilities  You may be able to legally avoid product warranties or product liability in an asset purchase, but be careful about the business consequences  The purchaser is probably liable for any products in inventory when the business is purchased  Must carefully inspect products and warranties given to customers to determine potential liability  What representations are to be made by the vendor? What indemnities? How is it funded? Labour/Employment Issues  Successor employer laws – buyer essentially steps into the shoes of the previous employer  Purchaser should review employees early on and decide who to keep o Options for dealing with the termination of other employees:  Terminate all prior to closing  Terminate some prior to closing  Parties share cost of termination for some period after closing  The vendor or purchaser can bear the cost of termination for some period after closing  ESA and common law – the purchaser of a business, shares or assets, is a successor employer and the employment of the employees
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