One way to financial independence is having a successful
business. There are an endless number of business
possibilities, including turning a hobby or a special skill
into a business, selling goods in a store or on the internet, or having a
website which can earn advertising revenue. The only
limitation is your imagination. In order to run a
successful business, you must know a little bit about every
job including president, bookkeeper, sales person, human
resources manager, and laborer. You may be doing all
these jobs yourself. If you stop and look at all the
skills you need it might seem insurmountable, but if you
acquire these skills slowly by starting a business from
scratch, it is amazing how much you can learn.
One thing is certain no matter whether you start or
buy a business - you will be committing yourself to long
hours and probably low pay, at least in the beginning.
We have purchased one business and started three from
scratch, including this website. When we started the
first business we had no business knowledge. We
learned along the way, made enough money to stay out of
bankruptcy, raise a family and pay all the bills, and retire
at 50 (except for this website!). If we can do it, you
probably can too.
If you are looking into starting or buying a
business, keep track of your expenses for tax purposes.
If your small business is incorporated you may be able to
take advantage of the $750,000
capital gains deduction if you sell the shares of the
business.
Advantages of starting your own business:
learn as you go
can be started with little money
earnings from the business can be used to fund
expansion
can probably be run from home
may be able to do in spare time
might find out you hate it, before committing large
sums of money
if the business does well you can do it full time
slowly build a network of customers and business
acquaintances who can provide advice/feedback
Advantages of buying a business:
revenue coming in immediately
previous owner may be able to train
immediate customer base
historical financial statements show you how
profitable the business is
Disadvantages of buying a business:
need more money for financing
may find out you hate it after committing large sums
of money (we did this)
may inherit liabilities from previous owner (happened
to us)
assets may not be worth as much as expected (do your due
diligence)
Buying a business is a more complicated than starting one
from scratch. You must do your due diligence to find
out if all the information provided by the seller is
correct. You will want to verify the value of assets,
confirm that the financial statements truly represent the
financial condition of the business, satisfy yourself that
there is a good customer base, and ascertain whether there
are any hidden liabilities.
If you are considering purchasing a business with
employees, you are going to have to rely on employees or
contractors to assist in operating the business. You
may inherit a fair number of employees, without having a
good sense of how to manage a business and employees.
If the previous owner is willing to stay on to help orient
you to the business, this may be helpful (or not, depending
on the previous owner).
Generally, if you are considering purchasing a business,
you will either be buying shares or assets. If the
business is not incorporated, you will be buying the
assets. If the business is incorporated, you will
often have a choice between buying shares and buying assets.
Whether buying shares or assets, it is important to
determine whether you will be acquiring any liabilities or
contracts that are associated with the business. For
instance, in some provinces, if the employees of a business
are part of a union, any purchaser of the assets is
responsible for carrying on the union contract. Some
assets could be pledged as collateral for loans, so it would
be important to ensure the assets are free of liens or
encumbrances.
When buying an incorporated business, you can either buy
the shares of the business, or the assets of the
business. If the business is a qualifying small
business corporation, the seller will probably want to sell
the shares, in order to take advantage of the $750,000
capital gains deduction. This may make the seller
motivated to accept a lower price than if the assets were
sold.
Advantages of buying shares:
keeping the company name, which makes the change of
ownership less transparent to clients/customers
seller should be motivated to accept a lower price
non-capital losses of the purchased corporation may be
used by the new owner under certain circumstances
if corporation is in a loss position with losses
expiring soon, may be able to amend prior tax returns to
reduce the losses
Disadvantages of buying shares:
all liabilities of the corporation are being assumed
more possibility of hidden liabilities which may be
revealed in audits, such as
provincial sales tax
workers' compensation premiums
payroll taxes
income taxes
capital cost allowance will be based on the tax values
of the assets in the corporation before the purchase,
which could be significantly lower than their fair
market values
Advantages of buying assets:
you will be able to claim capital cost allowance based
on the price paid for each depreciable asset.
you are not assuming all the liabilities of the
corporation, so there is less chance of
"hidden" liabilities
Disadvantages of buying assets:
provincial sales taxes may be payable on the price of
the assets
non-capital losses of the corporation selling the
assets cannot be used by the buyer
When the assets of a corporation are purchased, it is
important to determine the allocation of total purchase
price to each asset, for capital cost allowance
purposes. If land is part of the purchase, the seller
will want to allocate a higher value to land than to
depreciable assets, in order to avoid recapture of capital
cost allowance. The buyer of the assets will want to
allocate a higher value to depreciable assets in order to
maximize future capital cost allowance. If the buyer
and seller do not agree on an allocation, it is possible
that Canada Revenue Agency could reallocate the purchase
price among the assets based on fair market value.
When buying a business, the buyer may buy the shares or
assets personally, or through a corporation.
It is advisable to do a thorough analysis of after-tax
cash flows from the purchased business, comparing the
scenarios of buying assets versus shares. Professional
financial and legal help in this area is strongly advised.
The above information is not a complete list of
everything that is entailed in buying a business. A
professional accountant can help with your due diligence.
Tax tip: If you are
buying anything bigger than a lemonade stand, get
professional advice!
The information on this site is not intended to be a
substitute for professional advice. Each person's situation differs, and
a professional advisor can assist you in using the information on this web
site to your best advantage.
See our Business
Directory for tax, accounting and finance-related firms in your
area.
Please see our legal
disclaimer.
