The construction industry is starting to see an increase in ownership changes as owners decide to retire and pass on their legacy to the next generation, a key employee or a third party. The sale of a business sets up the seller’s retirement plans while the purchaser can move from a skilled construction worker to an owner building his/her own legacy. As such, understanding the benefits and drawbacks of different purchase and sale options is vital.The actual structure of the company being purchased will vary the overall results, therefore obtaining advice from your trusted advisors early in the process will be important.
Often much of the value of a construction company is in its equipment, inventory and goodwill (such as the company name). In these situations, the purchaser would prefer to purchase the assets of the company rather than the shares.
- Not acquiring the liabilities (known and unknown) of the previous owner’s operations, therefore less risk.
- Only obtaining the parts of the business that you want and then building your own company.
- The amount paid to purchase assets is tax deductible over the life of the assets for the purchaser while the amount paid for shares has no tax benefit until the shares are sold in the future.
- Will need to set up accounts for HST, WSIB, HST, payroll, etc. as needed for your business.
- Proceeds received on the sale of assets are in your corporation and will be taxed as you pull the funds out to use personally. Therefore, you must consider the overall tax cost. However, this can allow for a deferral of the personal portion of the tax by leaving the funds in the company until they are needed personally.
- You still own your corporation and therefore are responsible for any liabilities (known and unknown) and filings (HST, corporate tax, etc.).
- You may be responsible for severance pay to your employees who are not moving as part of the deal.
When the company being purchased has value above that of its assets (such as skilled labour and goodwill), it can be beneficial for both the buyer and the seller to consider a share purchase and sale. Under this option the purchaser buys the entire corporation.
- By purchasing shares, you are purchasing the entire business along with any “skeletons in the closet”, therefore due diligence or a strong knowledge of the past operations (for a key employee, for example) is important. Should there be a lawsuit, tax audit or employee obligations in the future, you would be responsible.
- You can still require the seller to keep certain assets that you do not want or consolidate operations into one company, for example, through the negotiations.
- Potential access to the capital gains exemption on the sale resulting in a significant tax savings (around $230,000 per exemption).
- If debt is taken back as part of the transaction, the seller may be able to defer some of the tax on the share sale by using tax reserves. (Also available for an asset sale).
- The size of a share transaction could lead to AMT which is payable on your personal return for the year of the share sale but is refundable in the following seven years if you report income on your tax return.
- As the seller may not want all the assets within your company, you may need to undertake some corporate restructuring prior to the sale. You may also want to restructure if the shares are held by a holding company in order to qualify for the capital gains exemption.
On top of the direct terms of the purchase and sale, there are other items to consider as well:
- Bonding – An acquisition will likely lead to a significant change in the equity of the company and could jeopardize bonding on current and future jobs and must be considered.
- Financing – Does the purchaser have the funds to complete the transaction? Financing should be reviewed by the purchaser early in the discussions to structure payments and terms in line with their available funds.
- Timing – Date of the deal closing could allow the seller to have access to different tax rates and the indexing of the capital gains exemption and therefore needs to be considered.
Generally given the same purchase price, an asset sale would be preferred by the purchaser while a share sale would be preferred by the seller. Having your advisors and professionals included in all aspects of a potential transaction can ensure you are fully informed and get to the best possible result.