How to sell intellectual assets?

So You Want to Sell your Business?  June 24, 2010 – 10:16 am
of intellectual capital

By David Smith, Partner

In my years of practicing business law, I have often advised clients who had agreed to sell their business and had even agreed on a sale price. Both the client and the buyer thought it would not be unreasonable for the lawyers to be able to paper the sale in a week, or two at most.  The buyer could be a key employee, supplier or competitor.  Lets just “git ‘r done” they instruct me.

Not so fast.  A first major decision, and one which is often overlooked, is whether the sale is to be a sale of shares, or a sale of assets, or some combination of them.  The seller cares because he or she may be able to utilize a personal capital gains tax exemption and save up to $350, 000 in tax.  Furthermore, the company will be owned by the buyer.  All employees, contracts, etc. go with it.  No HST or Land Transfer Tax – nice and tidy.

However the buyer will normally prefer to purchase assets.  Although there may be Land Transfer Tax payable if land is involved, that is worth the cost as the buyer does not then assume product warranties, employee issues or any adverse “past history” that may be lurking below the surface in the Company – such as CRA corporate tax re-assessments.  A buyer may agree to purchase shares where it is satisfied that the Company is generally clean and it can capture business losses to be used against profits.  This “shares” vs. “assets” issue commonly results in a further negotiation of the price, and also the inclusion of holdbacks or seller debt in order to guarantee the buyer it is getting what it bargained for.

The message – make sure you have sound accounting, tax and legal advice in structuring the transaction from the outset.

Source: Barriston Law Blog

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