Short explainer by Bob Gauvreau on the two primary ways to acquire a business: buying shares or buying assets. Covers when a share purchase is preferable (preserves company history, existing credit/relationships) and its tax result (cost base, capital gains on sale), versus when an asset purchase is preferable (depreciable basis, clean slate, less due diligence). Notes that sellers typically prefer share sales for tax efficiency while buyers prefer asset purchases; deals often land in a middle ground.
Chapters
Okay, so let's talk about business acquisition strategies, how one could go about acquiring a business. So really, there's two specific ways that you can go about doing it, and this is really just a matter of fact in how you can acquire it. How you approach buying a business is a totally different topic. But what the two ways are that you can acquire a business is what I want to specifically talk about. So the very first way that we can acquire a business is as someone who wants to invest in it, is to acquire the shares of the business. Now, why would we want to acquire the shares of the business? Well, if the business has a lot of positive history that's happened, there's credit that's been available, there's a long established history of positive relationships and transactions with third parties, with vendors, with customers, we would likely want to acquire the shares of the business. Now, all of that history comes with it. When you acquire the shares, one of the challenges is, so let's say we buy the shares for $1 million. There's nothing that I can depreciate on that purchase. It just ends up being the cost base of my purchase. And when I eventually sell the business down the road, if I sell the shares, I sell it for $2 million. My taxes that I would pay would be 2 million less the million I paid or $1 million of taxable income on that transaction. I would pay capital gains tax on that. So that's one. One particular way why we would want to have it and just some, you know, some key elements of what would happen in a share purchase agreement versus the second way that we can acquire a company which is going to be acquiring the assets. Now, as an advisor, typically I would advise my clients to go after acquiring assets over shares for a few reasons. One, when we acquire the assets for $1 million, let's say, let's say it's. It's all goodwill. What I can do is I can actually depreciate that value and get a tax deduction related to that every year. Now, it's not a high depreciation rate, but at least I get access to that deduction. Saves me tax money every single year. The other reason it's beneficial is that as a buyer, when we're buying just the assets, we don't get the history of what's happened in the company like we would when we acquire the shares. So when you acquire the shares, all that history, including all the tax filings, any of the debt, any of the good and bad relationships that have happened, employees that have previously worked at the organization that have maybe been fired or wrongfully terminated. As you buy the shares, all of that history comes with it. If you buy the assets, it's a clean slate. You can essentially start a new company to acquire the assets. The new asset comes in clean slate, no history. So no negative history. If you're looking at acquiring a business and you buy the assets, it's going to have greater upfront tax benefits. And then lastly, it's going to be an easier way to acquire a company with less due diligence because we don't have to look into the history of what the company has done or any skeletons in the closet of the past. So acquiring the assets, better tax value. Typically, as a seller, the sellers are going to want to sell the shares because it's more tax efficient for them, and the buyers are going to want to buy the assets because it's more tax efficient for them. Usually it's some form of a hybrid or a happy place in between. So those are the two ways that you can acquire a business. If you need any more information, feel free to reach out and we can support you with your business acquisition.
