Sale of business can take place either by sale of assets or by sale of shares.

Sale and Purchase of Assets

Vendor has a choice to sell assets of his / her choice.

If the price allocated to an asset is greater than its book value, the vendor’s recapture of capital cost allowance becomes taxable income for vendor.

If the price of an asset is greater than the cost of asset, the difference between cost and price recovered is subject to capital gains tax.

In an asset sale, vendor can be left with assets for which corporation has no use.

After disposal of assets, shareholders and directors of the vendor corporation are left with the task of winding it up and preparing tax returns and corporate filings.

Purchaser can pick and choose the assets he or she want. (Vendor has the choice to accept the purchaser’s terms)

In a shares purchase, the purchaser automatically assumes all of the corporation’s debts and liabilities.

Purchaser of assets assumes no debts or liabilities other than those specifically agreed to.

The purchaser will start capital cost allowance calculations based on the purchase price of the assets.

By picking and choosing among the assets offered for sale, it is possible that the purchaser will overlook assets that could be useful in business.

It is possible that a purchaser may never be regarded by customers and suppliers as the legitimate successor to a business if the purchaser does not acquire the entire business by way of share sale.

Asset sales are usually negotiated by the parties themselves or through a commercial broker or an agent who specializes in the purchase and sale of businesses.

Agreement of Sale and Purchase

The agreement of sale and purchase will have following information.

Parties

The legally correct names of the purchaser and vendor.

Purchase Price

The offer must indicate the purchase price and clearly set out the details of how and when the price is to be paid.

Assets

The assets being purchased are listed in a schedule attached to the agreement of purchase and sale.

List of Items

It is important to provide a precise description when listing items such as office equipment, models and serial numbers.

Inventory

An asset purchaser who wants to continue operating the business will usually purchase its inventory.

Inventory is usually counted on the day of closing or the evening before and its value is added to the purchase price.

If the vendor is a manufacturer, the term “inventory” also includes the raw materials and work in process owned by it and used to manufacture its products.

Intellectual Property

If business names, patents or trademarks are being purchased, they must be described in full. The vendor must arrange for the transfer of any patents or trademarks to the purchaser.

Goodwill

Goodwill is the term for those intangible aspects of a business, such as its reputation, client base, and location that go into making it a recognized and successful concern.

Goodwill is often assigned a dollar value and included in the agreement of purchase and sale.

Real Property

Any real property being purchased must be identified in the asset agreement of purchase and sale and must also be dealt with in a separate real estate agreement.

Lease Agreement

In case where the business premises are leased by the vendor, the agreement will specify that the vendor is to assign the lease to the purchaser on closing.

The effect of the assignment is that the purchaser assumes all the rights and responsibilities of the lease originally entered into between the landlord and the vendor.

Most commercial leases require the landlord to approve an assignment, the purchaser needs to give the landlord sufficient information for a credit check.

Allocation of Purchase Price

It is always best to include an allocation of the purchase price as it relates to each asset or category of assets.

Training

In many cases the purchaser requires the vendor to provide training in the operation of the business. The nature of this training should be specified clearly in the agreement, including details on how long the training is to last.

Non-Competition

A purchaser who is buying the assets of a successful business will not want the vendor to start a competing business after closing. A purchaser must ensure that the agreement contains a clause stating that the vendor or its shareholders and directors agree not to compete as owner, partner, employee, shareholder consultant or otherwise with the purchaser in a specific territory for a specifies period of time.

Employees

Asset sales agreements often state that the vendor is required to terminate the employment of all its employees in accordance with the notice and severance pay requirements of employment legislation and the common law, and is legally responsible for any failures in this regard. This enables the purchaser to hire whichever of the vendor’s employees the purchaser wants.

Confidentiality and non-disclosure

If the business is large or needs to safeguard valuable trade secrets, or if the transaction is going to take a long time to complete, the purchaser may be asked to sign a document stating that confidential information acquired during the negotiations will not be disclosed to others unless acquired as part of the sale itself. The vendor in return may be asked to keep information about the business confidential after closing.

PPSA search before closing

If a PPSA search discloses a registration against the vendor, the purchaser will want a discharge before closing. In case where the purchaser has agreed to assume the liability in question, the creditor will take steps to amend the PPSA registration to show the transfer to the purchaser of the asset that is security.

Real Property

When the purchaser is buying assets that include real property, the usual real property searches must be performed. These include a little search to check that the vendor holds good title and that there are no liens and so forth against the property; searches to ensure that municipal tax and utility payments are up to date; and searches to ensure that there are no work orders against the property and that it complies with all zoning bylaws.

Bulk Sale Act

The lawyer of purchaser conducts the bulk sale search to ensure that creditors were properly provided for in the prior transaction and will not follow the current vendor or purchaser for funds. No search is required if the vendor in the current transaction is first owner of the business.

Corporate Searches

When the vendor is a corporation, searches must be performed to ensure that it is valid and in existence, in other words, it has not been dissolved or wound up.

Corporation point in time report

This report provides a list of all directors and officers on file at the specific date. This report is particularly useful if one needs to know who the directors and officers were at a particular date.

Corporation Profile Report

This report provides information based on the most recent Form 1 filed by the corporation under the corporation’s information act. It also includes information from any articles filed by the corporation.

Corporate Document List

This search identifies all documents filed with the company’s branch by the corporation since June 27, 1992.

Certificate of Status

This document provides information on the current status of the corporation. It indicates whether the corporation has been dissolved. Because the certificate is tied to a specific recent date, the corporate search reports need to be obtained to ensure that the vendor was continuously in existence during the time it owned assets. If it was not, it probably does not have title to the assets.

Current Business Names registered by a Corporation

The list of current business names registered by a corporation provides all of the business names filed by a corporation with in the past five years. This search report is obtained when a business name other than the registered name of the corporation itself is being purchased as an asset of the business.

Bankruptcy

The purchaser must ensure that the vendor is not an undischarged bankrupt. If the vendor is an undischarged bankrupt, he or she cannot sell the asset because they will have been assigned to a trustee in bankruptcy.

Other Searches

Where assets are being purchased from a business concerned with trucking, shipping, aviation or railways, other searches may be needed to ensure that no liens or encumbrances have been registered against the assets and that all licenses for carrying on business with the assets are in good standing and transferable to the purchaser.

Documents required on closing

Bill of Sales

The purpose of bill of sale is to verify, under oath, that the transaction is legitimate and is undertaken in good faith and for the value. The consideration noted in the bill of sale relates only to those items that attract retail sales tax.

Other Documents

For assets such as patents, motor vehicles and real property, a bill of sale is insufficient to transfer ownership. Other documents such as a deed of land are required from the vendor.

Shareholders Resolution

If a corporation is selling all or most of its assets, section 184 of the OBCA requires approval by a shareholder’s special resolution.

Transfer of Business Name

The vendor’s business name is part of the asset sale. Where the name has been registered under the Business Name Act, the vendor registers a cancellation of its right to use the name and the purchaser registers the name at its own expense.

Assignment of Lease

If the purchaser is taking over a commercial lease, he or she needs following documents on closing:

An assignment of the lease from the vendor. This gives the purchaser the right to occupy the premises for the remainder of the term as well as any rights of renewal that might be in the lease.

The landlord’s consent to the assignment. This is usually required by the lease. Failure to obtain it can void the lease and expose the purchaser of eviction.

An acknowledgement from the landlord that the lease is in good standing, that rental payments are up to date, and that there is nothing to prevent the new tenant from exercising and renewal options in the lease. The acknowledgement also confirms the amounts payable under the lease and the details of any security deposit or payment towards the last month’s rent.

Income Tax Affidavit

Section 116 of the income tax act requires the purchaser to withhold one third of the purchase price for payment to the government in the event that the vendor is a non-resident of Canada at the time of signing the agreement of purchase and sale to sell the business or at the time of completion of the transaction.

Registrations after closing

After closing, purchaser’s lawyer must immediately attend to the following registrations:

Where applicable, cancellation of the Vendor’s business name under the Business Names Act and registration of that name by the purchaser. If purchaser has acquired the name of the Vendor’s corporation, the lawyer must ensure that the vendor has registered articles of amendment.

An affidavit of the Bulk Sales Act, which is affixed to the Bulk Sales Act documents received from the vendor on closing and then registered with the office of the Superior Court of Justice in the jurisdiction where the business is carried on.

If real property was purchased, the deed and other applicable instruments must be registered on title.

File the mandated election form under the GST with Canada Customs and Revenue Agency. This permits the sale of all or substantially all of the Vendor’s assets without requiring payment of GST.

Disclaimer:

This information is for educational purposes only. It does not constitute any legal advice or opinion. Please do not use any of its contents without seeking a professional advice.

References:

The fundamentals of corporate law and procedure

By Mark Walma and Patricia McCann – Smith

Publisher: Edmond Montogomery Publications Limited, Toronto, Canada.