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Asset purchase

Buying a Business via Asset Purchase

Buying a business through an asset purchase can be a strategic way to grow your operations, or for new business owners to get their foot in the door, but it requires careful planning and due diligence. Below, we outline the top 10 things you need to know to ensure a smooth transaction and protect your investment.

  1. Asset Identification
One of the first steps in an asset purchase is clearly identifying what you are buying. This includes tangible assets such as equipment, inventory, and real estate, as well as intangible assets like intellectual property, customer lists, goodwill, and trademarks. A detailed inventory of assets in the purchase agreement is essential to avoid misunderstandings and ensure nothing is overlooked.
  1. Liabilities
Unlike a share purchase, an asset purchase allows the buyer to acquire the desired assets without automatically assuming the seller’s liabilities. However, it is crucial to conduct thorough due diligence to ensure there are no hidden liabilities, such as unpaid taxes, liens, or environmental issues, that could unexpectedly attach to the assets.
  1. Due Diligence
Comprehensive due diligence is the cornerstone of a successful asset purchase. This process includes verifying the ownership and condition of assets, ensuring there are no encumbrances or liens, obtaining employee information if you are planning on assuming the existing employees, and reviewing legal and financial records. Due diligence protects you from surprises post-transaction and ensures you are paying a fair price for what you receive.
  1. Valuation
Determining the fair market value of the assets is essential to avoid overpaying. Professional appraisals may be necessary, particularly for specialized equipment, intellectual property, or real estate. Accurate valuation ensures both parties have a clear understanding of the transaction’s financial terms.
  1. Contracts and Agreements
Assets often come with associated contracts, such as leases, supplier agreements, or customer contracts. It is important to review these contracts to understand their terms and whether they can be assigned to you as the buyer. Certain agreements may require the consent of third parties, which should be addressed early in the process.
  1. Regulatory Approvals
Certain industries or assets require regulatory approvals or permits for transfer. For example, licenses in healthcare, finance, or food services may need to be reissued or approved by regulatory bodies. Ensure you understand these requirements and factor them into your timeline.
  1. Tax Implications

An asset purchase can have significant tax implications, including sales tax, transfer taxes, and potential impacts on your tax position. In the context of an asset purchase in Ontario, Canada, the Harmonized Sales Tax (HST) exemption can be a significant consideration. Here’s an explanation of how it generally works:

Section 167 Election

Under the Excise Tax Act, a purchaser and a vendor can jointly elect to have the sale of a business’s assets treated as a “sale of a business” for HST purposes. This is commonly referred to as a Section 167 election. When this election is made, the sale is exempt from HST, provided certain conditions are met.

Conditions for the Election
  • The purchaser must be acquiring ownership, possession, or use of all or substantially all of the property necessary for the business to continue as a going concern.
  • Both parties must be registered for GST/HST at the time of the sale.
  • The election must be filed with the Canada Revenue Agency (CRA) using the prescribed form.
Substantially All Test

The “substantially all” test generally means that the purchaser is acquiring at least 90% of the assets necessary to carry on the business. This includes both tangible and intangible assets.

Filing the Election

The election is made by completing and filing Form GST44, “Election Concerning the Acquisition of a Business or Part of a Business,” with the CRA. This form must be filed by the due date of the purchaser’s GST/HST return for the reporting period in which the sale took place.

Benefits

When a Section 167 election is made, the sale of the business assets is treated as a non-taxable supply for HST purposes. This means that no HST is charged on the transaction, and the purchaser does not have to pay HST at the time of purchase.  By not having to pay HST upfront, the purchaser benefits from improved cash flow. Normally, if HST were charged, the purchaser would have to pay the tax and then claim it back as an input tax credit in their GST/HST return, which could take time. The election simplifies the transaction by eliminating the need to account for HST on the sale, reducing the administrative burden for both the vendor and the purchaser.

Exceptions

Certain types of property, such as real property, may not be eligible for the election, and specific rules apply to financial institutions and other special cases.

It is crucial for both parties to consult with tax professionals to ensure compliance with all requirements and to properly execute the election.

  1. Transition and Integration
Successfully integrating the purchased assets into your existing operations requires careful planning. This may include transferring employees, aligning systems, communicating with customers and suppliers, and ensuring a smooth operational transition. A detailed transition plan minimizes disruptions and ensures continued business success.
  1. Purchase Agreement

The purchase agreement is the legal foundation of your transaction. It should include all terms and conditions of the sale, such as:

  • Representations and warranties from the seller.
  • Indemnity clauses to protect against undisclosed liabilities.
  • Conditions precedent to closing.
  • A clear outline of payment terms and asset delivery.

A well-drafted agreement minimizes disputes and protects your interests.

  1. Closing Process
The closing process involves executing all necessary documents, making final payments, and satisfying any pre-closing conditions. This stage requires attention to detail to ensure a seamless handover. Work closely with your legal and financial advisors to confirm that every aspect of the deal is completed accurately.

Why Choose Our Law Firm?

At Hummingbird Lawyers, we specialize in business transactions and have extensive experience guiding clients through asset purchases. From conducting due diligence to drafting purchase agreements and managing the closing process, our team ensures your interests are protected every step of the way.

Contact us today to schedule a consultation and let us help you navigate the complexities of buying a business through an asset purchase. Your success is our priority.

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