Buying a Business

Buying a business can be a complex process. What should I check? How much should I offer? What documents do I need? Should I purchase the company’s assets or shares? This article will help you understand this process.

Have you performed due diligence?

Before buying a business, you need to be sure you understand exactly what you’re buying! This is the purpose of “due diligence,” which is the process of evaluating certain important aspects of the business you want to buy. These can vary according to the type of purchase. Here are some examples of what to look into.

Profitability

Is the business currently profitable? Is it viable over the long term? To find out, examine the company’s financial statements and or assets (equipment, accounts receivable, etc.).

Information about the vendor

Make sure that the vendor is the sole and true owner of the business, and that they are acting honestly and in good faith. For example, have they provided an accurate and comprehensive portrait of the company?

The company’s obligations

The company’s existing contracts (with employees, suppliers, etc.) must be considered when buying or selling a business. To learn more about who is responsible for these contracts after a sale, see our article Buying a Business: What Happens to the Existing Contracts?

How can I assess the value of a company?

It is important to have a good idea of the value of a business before making a formal offer to purchase. Knowing what the business is truly worth gives you a solid basis for negotiating with the seller.

Business valuation

Determining a company’s value is not an exact science. There are several ways to go about this. Here are three of the most common:

Income-based approach

The most common method is calculating a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization). This calculation is typically used by professional business valuators to determine a company’s value.

Assets-based approach

Another method is to assess the value of the property (“assets”) that a company owns (equipment, buildings, etc.).

Market-based approach

This method involves determining the value of the business by checking what comparable companies have sold for.

Consult an expert

Determining a company’s value is a complex process. It’s usually a good idea to hire a professional business valuator.

Some business valuators belong to a professional association, like the Chartered Business Valuators (CBV) of the Chartered Business Valuators Institute.

What is the difference between a letter of intent, a purchase offer, and a purchase agreement?

Buying a company can involve all three of these documents. Although they may seem similar, they each play a distinct role.

Letter of intent

A letter of intent is a document signed by you and the vendor that sets out the key elements of a potential transaction.  It confirms your interest in the acquisition and reassures the vendor of your willingness to submit an offer.  It also serves as a basis for the upcoming negotiations.

The letter of intent may include things like:

• the purpose of the transaction (for example, to purchase shares or to purchase assets, such as equipment)
• a price range
• a period during which the vendor agrees not to solicit or consider other offers

Purchase offer

A purchase offer is a document used to formally offer to buy the business. It contains all the essential elements of the proposed purchase, including:

• the price
• the purpose of the sale (for example, to purchase shares or to purchase assets such as equipment)
• the payment terms (a single lump-sum payment or multiple instalments, payment by check, etc.)
• the obligations of each party (for example, non-competition clause or non-solicitation of clients or employees clause)
• the expiry date of the offer

A purchase offer creates more legal obligations than a letter of intent. If you make a purchase offer and the vendor accepts it by the specified time limit, you must go through with the purchase.

Purchase agreement

A purchase agreement is a document that you and the vendor sign once your offer has been accepted. It often restates information from the purchase offer, and describes the final transaction in detail, including:

• the price
• the purpose of the sale (for example, to purchase shares or to purchase assets such as equipment)
• the payment terms (a single lump-sum payment or multiple instalments, payment by check, etc.)
• the declarations and warranties for everything that is being purchased
• the obligations of all parties (for example, non-competition clause or non-solicitation of clients or employees clause)
• the penalties if you or the vendor do not respect the agreement

What is the difference between purchasing assets and purchasing shares?

These are the two common ways of buying a business, and both have their pros and cons. Sometimes, a buyer purchases both the assets and the shares.

Purchasing assets

In this kind of sale, you purchase the company’s assets.

The term “assets” refers to everything a company owns. This can include tangible property like equipment, inventory, and buildings, or intangible property like the company’s name and intellectual property.

An asset sale is more attractive for the buyer, namely from a taxation point of view. This is because by purchasing the assets, you can deduct the purchase price from income over several years. This is called “depreciation”.

Furthermore, when you purchase the assets only, you do not become liable for the company’s past, like its debts or any legal proceedings against it.

Purchasing shares

You can also buy all or most of the stock of a company, which means buying the shares from its shareholders.

In terms of taxation, sellers will probably prefer a sale of shares. That’s because the vendor may be eligible for a lifetime capital gains exemption. “Capital gains” refer to how much the shares increased in value between the date when they were purchased and the date when they were sold.

While buying shares may have some advantages for the buyer, it also means assuming liability for the company’s past, including any debt and lawsuits.

For more information about buying and selling a business, see the website of the Centre de transfert d’entreprise du Québec (French only).