Buying A Business
Is the business
worth what the vendor is asking?
The
reasons people go into business for themselves are as varied as the people
who do it. Let’s
say that after doing some preliminary research and analysis, you don’t
want to start a business from scratch.
Therefore, you have decided to buy an existing business.
Let’s further assume that you have decided what type of business
you want to be in and have a specific business in mind.
Before
going any further, take a minute and stop!
Unless you are extremely lucky or have a background in law, finance,
income tax and economics, you should seek out some professional advice.
The decisions and commitments you make at the pre-purchase stage of
buying a business could mean the difference between prosperity and
bankruptcy.
Is
the business worth what the vendor is asking?:
Fair
market value is loosely defined as "the highest price expressed in
money obtained in an open and unrestricted market between knowledgeable,
prudent and willing parties dealing at arm's length, who are fully informed
and not under compulsion to transact."
This
definition implies a number of things which are worth remembering:
-
Negotiation
is an important component to valuation. The "advertised" or
asking price of a business is rarely what is actually paid.
-
Being
100% informed is not possible. There is always an element of risk that
the purchaser is going to assume. This is simply a part of business.
Purchasers should consider whether the historical financial statements
were audited or reviewed by an independent accountant. This will add to
the reliability of the information.
-
There
are sometimes emotional factors that come into play from the point of
view of both the buyer and the seller. These can't be ignored, but the
numbers must be looked at.
-
Getting
professional INDEPENDENT valuation on the business can be very useful.
Again, this is not a guarantee you will not pay too much, but can
greatly reduce the risk.
Independent
advice could come from a number of sources like a chartered accountant (CA)
or chartered business valuator (CBV).
Purchasing
Shares or assets of a company:
When
you buy a business, you are typically buying the shares of an existing
corporation or the specific assets of either an individual, corporation,
partnership or other legal entity.
If
you buy the shares of a company, you are buying the assets and liabilities
of the company.
This includes both the assets and liabilities on the books, and the
assets and liabilities that are not on the books. There is always a risk of
assuming a liability that is not disclosed (e.g., possible income tax
assessment, lawsuit, environmental cleanup costs, etc.). This risk can be
reduced by having the vendor indemnify against undisclosed liabilities.
The
vendor may be more willing to sell his or her shares in a company to get
various tax advantages including a possible "tax free" gain of up
to $500,000.
Because
of this, most vendors will sell their shares cheaper than if they sold the
assets in the company separately. This could benefit the purchaser in terms
of a lower purchase price but future tax costs need to be considered.
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Purchasing Shares or assets
of a company continued:
If real property (land and buildings) is part of the business, then by purchasing
the shares rather than the assets, the purchaser will avoid BC property
purchase tax (1-2% times the value of the property sold).
If assets are purchased, there may
also be provincial sales taxes and GST to be paid.
Conclusion:
Being in business can be extremely rewarding from both a personal and
financial perspective. These rewards do have costs. Without a well thought
out business plan, sufficient capital, and a willingness to work hard and
take a risk, chances are, you're asking for trouble.
Church Pickard Online: is an outstanding new part of our commitment to providing fast, efficient,
and innovative solutions to business.
Winning Team |
John Annesley
B. A.,
C.A. Partner
|
Lorana LaPorte
B. Comm., C.A., C.F.P. Partner
|
Grant McDonald
B. Sc., C.A. Partner
|
Lee-Anne Harrison
B.Sc., C.A.
Audit Manager |
Erin Macrae
B.A., C.A.
Associate |
|
Lilia Riabets C.G.A.
Accounting Manager |
|
Kevin Jones
B.A., C.A.
Accounting Supervisor |
|
Anna Owens B.A., C.A. |
|
Paula Moscrip B.A., C.A. |
Sarah Zubkowski
B.A., Articling
Accountant |
|
Peter Sinclair
Senior Accounting
Technician |
Margaret Moore
Accounting
Technician |
Sharon Campbell
Accounting
Technician |
Kim Darling
B.A.
Accounting
Technician |
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Wendy Huntingford
Administrative Assistant |
Kathy Sabourin
Receptionist, Accounting
Technician, Administrative Assistant |
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