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What are the key factors to consider when purchasing a business inside Canada? If you are not prepared and make a mistake, it can cost you dearly. How to prepare and what you need to succeed when purchasing a PROFITABLE business either for immigration or non-immigration purposes such as diversifying your investments. It’s all possible and we’re going to go over the details in this article.
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*Financial Advisor/Auditor or Chartered Public Accountant or Firm
*Lawyer who has a trust account to hold the money before final transaction
*You will need a Letter of intent (LOI) with proof of liquid funds to purchase a business.
*An option to purchase agreement is needed with a deposit while your immigration paperwork is in process, so the business owner would be ‘locked’ until you receive your investor visa / work permit.
*You probably all have your own set of questions when scouting a business for sale, so do we, but here are a few critical ones that you may not have on your list yet, which you need to add when speaking with an owner who is seeking to sell their business:
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How much to pay for a business? Now let’s talk about the Valuation:
*You can hire a business valuation professional or accountant to help you in this process.
*Multiples of EBITA for each specific industry. The earnings that the business generates, before taxes, interest, amortization is the benchmark for valuations. If you are buying a business which has a lot of cash sales off the books, and you cannot verify any of the profits or revenues, make sure you are super careful in case you do not know the previous owner, or they are not family – as this may come back and hurt the business later.
*Consider the owner’s salary if not already taking it into account (i.e., they are on not on payroll).
*Real Estate can also be a big portion of the business valuation. In such cases it may be possible for the mortgage to be extended to the new buyer and/or a vendor to take back a mortgage (i.e., the seller extends a loan to the new buyer to take on the real estate)
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Goodwill is calculated by taking the purchase price of a company and subtracting the difference between the fair market value of the assets and liabilities. Examples of goodwill can be Customer loyalty, brand reputation, and other non-quantifiable assets. While “goodwill” and “intangible assets” are sometimes used interchangeably, there are significant differences between them. On a balance sheet "goodwill" and "intangible assets" are each separate line items. Goodwill cannot exist independently of the business, nor can it be sold, purchased, or transferred separately. A company's record of innovation and research and development and the experience of its management team are often included, too. As a result, goodwill has an indefinite useful life, unlike most intangible assets.
You could buy a Franchise, a Minority Stake with option to purchase outright, or purchasing Outright from the beginning with a transitional period (hold back) with the previous owner.
There are two ways to buy a non-publicly traded company in Canada:
Asset Purchase: Buying all or substantially all of the assets of a business (i.e., inventory, equipment, goodwill, trademarks, etc.); OR
Share Purchase: Buying all the issued and outstanding shares of a business.
It is a mistake to think that an asset purchase is a purchase of only part of a business. In both instances, the entire business is sold. The difference is a legal one.
An asset transaction is the purchase of a business’s assets. Here, we are procuring and stripping the assets out of a corporation and then once purchased, placing those assets into a fresh corporation. The ‘assets’ we refer to are inventory, equipment, customer lists, supplier lists, goodwill, accounts receivable, accounts payable, tradenames, contracts – everything that comprises the business is stripped and purchased.
In an Asset sale, prior liabilities such as line of credits or loans remain the liability of the seller and are typically paid out from the proceeds of closing to the extent the associated liens attach to the assets under sale.
For example, if somebody is the sole owner of a hair salon business in a commercial plaza, that business owner likely leased out a commercial unit from the commercial plaza owner (the landlord) to store the equipment (i.e., chairs, hair equipment, and so on….) and inventory (i.e. shampoo, conditioners, hair and cleaning materials, etc.) of the business. After decades of owning the hair salon business, the business owner decides that now is a great time to sell! The business owner can choose to either: 1) sell all the assets such as the equipment, inventory, and goodwill in the name “Richmond Hair Salon” – this is an Asset Sale; or 2) sell all the shares he/she holds in the Hair Salon business – this is a Share Sale.
Buyers would ideally want to buy the assets of a business. This way, the buyer would only be responsible for the liabilities attached to those assets, not the liabilities of the entire business. On the other hand, sellers would ideally want to sell all the shares of their business. In doing so, they will be selling all the business including both its assets and liabilities. Another reason buyers may prefer an asset purchase is because that way, he/she gets to pick and choose which assets to buy, and which to pass up.
There are also some tax advantages that come with asset purchases, and we recommend buyers to discuss these options with their financial advisors as part of their due diligence.
Having said that; however, Purchasers need to be wary of neglecting to purchase an important asset. For instance, if a Purchaser acquires a specific business and leaves out a key supply contract, that purchaser may not be able to operate the business.
This is a risk specific to asset purchase agreements, so a Purchaser will want to ensure their lawyer includes a representation from the Seller stating that all the assets they are acquiring constitute ALL the assets necessary to carry on business.
Keep in mind, the concept of a business and the concept of a corporation are distinct. A business is a particular revenue stream – for example, selling fruit. In Ontario, you may choose to run your business of selling fruit through one of three different vehicles: 1) Sole Proprietorship; 2) Partnership and 3) Corporation. A corporation then, is merely the vehicle through which you run your business. In an asset sale, we are buying the business (the inventory of fruit, the customer list, the supplier list, and leasehold improvements) separate and apart from the vehicle of the corporation; in a share sale, we are buying the shares of the corporation through which the business is run.
Deciding between an asset sale and share sale is a complicated matter because often the parties involved would benefit from opposing solutions. Typically, a seller prefers to sell shares and a purchaser prefers to purchase assets. However, the ultimate preference lies within the tax consequences and potential liabilities of each proposed structure.
The predominant reason why a purchaser wishes to purchase assets is because it can identify each individual asset and liability it wishes to procure; it does not acquire unknown or prior liabilities of the corporation such as its tax liabilities or employment liabilities.
Asset purchases are also more complicated and time-consuming than share purchases because the parties need to Identify and value specific assets, assign the assets to be purchased which will require transfers with different third parties, and consents to assign will also be required for third party contracts.
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By virtue of acquiring shares of a corporation, the purchaser, in simple terms, is acquiring the corporation itself including its underlying assets, liabilities (known and unknown). This is mainly why the vendor would prefer to sell the shares of the corporation in order to avoid being left with unwanted assets and liabilities. Additionally, and most importantly, the vendor can enjoy the tax advantage of the Lifetime Capital Gains Exemption- subject to availability under Income Tax Act.
In a Share Sale, the Ways that Purchasers can protect themselves from unknown liabilities include negotiating certain contractual provisions into the agreement such as indemnities, escrow provisions and representations and warranties of the seller that there are no undisclosed liabilities.
While the Purchaser takes on greater risk in this scenario, there is a significant need for thorough due diligence on the part of the Purchaser. Protective clauses and indemnities for tax and legal liabilities can also be incorporated into the Agreement. Notwithstanding the need for greater due diligence, share purchase transactions are simpler than asset purchases with fewer to no need for third-party consents depending on the nature of the business. Additionally, the purchase price in a sale share tends to be lower than that of an asset sale.
*Due diligence period. When your team of experts does a review of the financial and tax documents and other key verifications of the ongoing business.
*Closing date with closing documents for the final transaction. This is the date when everything is finalized, and the balance amount is paid to the previous business owner.
*There may be conditions that you state in the purchase & sale agreement either in favor of the buyer, seller, or both – to protect them.
*Common conditions in favour of the purchaser include obtaining satisfactory financing, due diligence of the business, which includes reviewing both financial and legal documents, and obtaining the landlord’s consent to the transaction.
*In most Agreements, the completion of the transaction is conditional upon certain items. This basically means that the ‘deal’ is not firm until the conditions are satisfied.
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For instance, in many cases it is conditional upon the lease being assigned to the purchaser, or it can be conditional on the purchaser obtaining financing or, it can be conditional on the assignment of other trade contracts that are fundamental to the business. Most of the time, it is conditional on the purchaser reviewing the financial statements of the target business to ensure that it is a viable business and that the purchase price is accurate. At a basic level, the purchaser wants to be sure about the profitability of the business he or she is purchasing. This is all conducted during the conditional period set out in the Agreement. The lawyer also drafts the assignment and assumption agreements for the transfer of the trade contracts, customer contracts or distributor agreements which would be required to be assigned over to the purchaser on the Closing Date.
*Some key documents and conditions which are there to protect the buyer are the Non-Competition Agreement, the Indemnity, the Termination or Hiring of the Employees of the business, the corporation resolutions and the statutory declarations and filings with the CRA (the Canada Revenue Agency which is responsible for all the taxation in the country).
You have 2 options when purchasing a business in Canada:
*Federal investor work permit (applicant or spouse)
*Provincial Nominee Program (for BC don’t buy before being approved)
Let’s say you don’t have an existing business in your home country which has full time staff on payroll at least 4-5, with positive cashflow and profits. Then you won’t be able to apply under the Intra-Company transfer significant benefit category to setup a branch in Canada. However, if you purchase or start a business, and it is running and Canadians are working under this company while you apply for your investor work permit, then yes you do have a very high chance of approval. This is one of 3 categories of the Federal Investor work permit that we help applicants for their immigration to Canada.
The key advantages of the Federal investor work permit are:
Let’s say you want to invest higher amounts or don’t have the eligibility to convert to a PR with the investor work permit. Then we would take you through the Provincial Nominee Programs which are a direct route to PR for you and your family. The main advantages are that not all provinces require proof of language right at the beginning when you apply, you may have time to improve your English or French for later, you don’t depend on Express Entry for PR conversion, and within 12-24 months you can be nominated for PR and continue to work on your business.
We can assist with all the provinces across Canada, except Quebec. Provincial Nominee Program minimum investment amounts can start around $200,000 but typically on average it will be $250,000 and in Toronto even higher. Owning and running a business under these programs is the key factor – whether a new business or if you are purchasing an existing business. Remember, in BC you cannot purchase it before the Provincial office approves you, but in Ontario it is allowed. Each province has their own regulations and fine print, make sure you are aware and are prepare before you invest.
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If you’re considering purchasing a business – whether it’s for immigration or not, we can help you facilitate the deal or even identify an inventory of businesses for sale. Legit businesses, not grocery stores or mechanics which most of the time have no potential for growth and in many cases won’t even match your profile. Whether you’re looking for a business in hospitality, IT, construction, real estate, textile, manufacturing, warehousing, etc. This all depends on your investment budget to buy a business in Canada.
Watch out for businesses that are for sale through real estate agents or other types of brokers which don’t specialize in this field.
When you work with us, you will be hiring an entire team of financial auditors, lawyers, and immigration experts that will support you.
Our team in Canada speaks over 8 languages, and we are licensed to support you and your family throughout the process! Get a FREE assessment now by filling out the form, click here.
