Buying a business

This blog is being set up to discuss interesting business issues and legal issues as they relate to small business in Ottawa. I thought I’d start with some comments on buying a business.

If you are interested in purchasing an existing business, you might be working with either a real estate agent or a business broker. Once you’ve decided on the business that you want to purchase and the purchase price, there are a number of factors to consider when it comes to drafting the Agreement of Purchase and Sale and completing the transaction. Keep in mind that the written Agreement of Purchase and Sale represents the entire agreement between the parties and anything that is important to the deal needs to be included in this Agreement. What are some things to keep in mind?

First, how are you going to allocate the purchase price? Once you have agreed upon the price, you need to decide how the purchase price will be allocated. The purchase price is allocated to goodwill, equipment, and leasehold improvements (and, sometimes, the lease itself). The allocation of the purchase price is important because it allows you to allocate part of the price to items which can be depreciated quickly such as leasehold improvements or equipment. From a tax perspective, this can be advantageous. Usually, it is in the buyer’s interests to allocate as much as possible of the purchase price to leasehold improvements. On the other hand, from the seller’s perspective, it is preferable to allocate as much as possible to goodwill. Depending upon the type of business you are purchasing, it is advisable to speak with an accountant about the best way to allocate the purchase price in your Agreement.

More tips to follow…