Whether you or your business is looking to acquire an asset/business
or sell one, there are many factors to consider. Valuation of the asset is critical and you
will want to do your due diligence to ensure you are paying or receiving a fair
price for the asset in question. You
will also want to consider the business strategy and implementation process to
ensure a smooth transition. Don’t forget
about the tax implications as every transaction will trigger tax consequences,
and you will want to have a tax optimal strategy.
Valuation
You can use a discounted cash flow method to arrive at an initial
valuation as a starting point. At the
end of the day, no matter what the valuation is determined for the company or
asset, the fair value is always going to be the purchase price that the buyer
is willing to pay, and the price that seller is willing to accept. All business transactions are completed on
good faith, and negotiating a fair value for the business or asset in question
is part of the process to complete the deal.
Having a transaction advisory to help you with the financial
statement due diligence and business valuation is an important step before
closing the transaction.
Strategy
Having a clear plan which projects expected future cash
flows from the new asset is critical. You
will want to have a strategy in place to utilize the new asset, for example if
you purchase new equipment, you will to assess the return on investment, payback
period on the investment, and create
projections the impact on net earnings for the business in the short term and
long term.
When you are selling capital assets, divisions of companies,
or a business itself you want to have an exit strategy. An important question is whether you will be
re-investing in other ventures or aspects of your business.
Tax implications
You will want to correctly assessing the tax implications of
the transaction.
For example, when a company is acquired by another company,
a deemed year end is triggered for the acquired company as of the date of the
acquisition. This may result in a short
taxation year end in which a tax return will need to be prepared.
Furthermore, you will want to assess the tax impact of
buying shares of a business vs. the assets.
In summary see below for some of the pros and cons of each:
Asset purchase
Pros:
-Usually favoured by the buyer since the acquirer doesn’t have to assume any
liabilities of the business.
-Excess to the favourable tax deductions through CCA (capital cost allowances),
at a higher value than otherwise would be possible if shares were acquired.
Cons:
- Since this is an advantage to the buyer, usually negotiations lead to a
higher closing cost if the shares were purchased.
Share Purchase:
Pros:
-The seller will largely benefit here since they will want to utilize the lifetime
capital gains exemption if not already. The seller can also employ other various tax
optimal strategies when selling shares.
-Furthermore, if the company to be acquired has loss carry forwards they are strategies
to utilize these losses to offset profits for the purchasing corporation.
The tax savings will be significant for the seller.
Cons:
-On the buyer’s side they will have to assume all liabilities.
-The seller will usually have to sell at a discount vs. selling just the shares
of the business since the advantages are in favour to the seller for a share
sale.
Business acquisition can result in some complex issues from
accounting, tax and legal side. For more information on how MP Group can assist
with mergers and acquisitions please contact a MP GROUP expert below.