Page 12 - Lets Talk Winter 2015 | Lipton Chartered Accountants
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ImPORTANT DUE DILIgENcE STEPS
WhEN AcqUIRINg A cOmPANY
Steven Polisuk, CBV, CFE, President – Lipton Polisuk Inc.
When contemplating the purchase of a business, identify the presence, if any, of environmental wish to have a legal due diligence conducted
to uncover liens, contingencies or lawsuits for
a due diligence investigation is important to hazards. If the purchaser is financing the
highlight the benefits and pitfalls of the potential acquisition the financial institution will likely which the purchaser may become responsible.
The purchaser will assume responsibility for the
acquisition. As a first step in the process, it is require that an environmental assessment
target company’s employees who are retained
necessary to determine whether the acquirer be undertaken. Other assets that may be
is purchasing the assets or shares of the target acquired, including inventory, will have to be and will not be able to dismiss those employees
company, as there are material differences in examined for saleability and obsolescence. it may consider to be redundant. Long standing
approach with respect to a purchase and sale of Inventory should be counted to confirm that employees will be entitled to compensation
assets versus that of shares. the physical inventory agrees with the target and other entitlements such as pensions. If the
target company has a unionized work place the
company’s records. Capital assets such as
Asset Purchase machinery and equipment will also have to terms of the union contract should be reviewed
In most cases an acquirer prefers to purchase be appraised and inspected for their value and to uncover clauses or terms that will negatively
the assets in order to write up asset values expected remaining useful life. affect operations going forward. As part of the
to their fair market value and then have the purchase and sale agreement, the status of the
future benefit of a higher tax base for the Share Purchase target company’s employee relationships will be
purposes of claiming capital cost allowance Vendors normally prefer to sell shares, as the subject to negation between the parties with the
(“CCA”), to thereby reducing future income proceeds (in excess of the adjusted cost base) vendor paying for some of these costs on closing.
taxes payable. Furthermore, by purchasing are generally considered a capital gain, and An important area to examine as part of the
assets, a purchaser only acquires those assets it are taxed more favorably than other forms share purchase is the revenue component.
wants, and is not responsible for any existing, of income. Only 50% of the gain is included The quality of the earnings must be measured
contingent or unknown liabilities of the and reviewed, including who are the
in income. Also, if the shares are those of a
company, but those specifically attached to the “Qualified Small Business Corporation”
clients/customers, and any contracts that may
asset(s) acquired. It is important to determine (“QSBC”), the seller may be eligible to receive be in place, including those with suppliers and
whether any third parties have an interest in up to $800,000 in capital gains ($400,000 of clients. Other issues to consider are economic
the assets, such as creditors or government taxable gains) tax free. dependence on key clients (or suppliers),
bodies. Where land and building are part of the the loss of whom could impact the business.
purchase, a title search should be conducted In a share purchase, the purchaser is in effect The purchaser should request and review a
to identify the owner of the property and stepping into the shoes of the shareholder
summary of sales and gross profit (that agrees
any liens thereon. The purchaser will likely vendor. The purchaser may be responsible for to the financial statements) by customer for
require an appraisal to assess its fair market many different liabilities such as payroll taxes, the past three years for indications of growth
value. Appraisals may also be required to value income taxes, harmonized sales tax (“HST”) or reduction in year-to-year customer sales.
the target’s inventory and machinery and and other. These pitfalls can be avoided by
equipment if these assets form a material part reviewing the target company’s tax remittances Earnings should be adjusted for non-
of the transaction. It is also prudent to have and statements provided by the various
recurring and unusual items such as gains
an environmental assessment of the land to government bodies. The purchaser may also or losses on the disposition of capital assets,
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Accounting & Assurance Tax Business Advisory
12
WhEN AcqUIRINg A cOmPANY
Steven Polisuk, CBV, CFE, President – Lipton Polisuk Inc.
When contemplating the purchase of a business, identify the presence, if any, of environmental wish to have a legal due diligence conducted
to uncover liens, contingencies or lawsuits for
a due diligence investigation is important to hazards. If the purchaser is financing the
highlight the benefits and pitfalls of the potential acquisition the financial institution will likely which the purchaser may become responsible.
The purchaser will assume responsibility for the
acquisition. As a first step in the process, it is require that an environmental assessment
target company’s employees who are retained
necessary to determine whether the acquirer be undertaken. Other assets that may be
is purchasing the assets or shares of the target acquired, including inventory, will have to be and will not be able to dismiss those employees
company, as there are material differences in examined for saleability and obsolescence. it may consider to be redundant. Long standing
approach with respect to a purchase and sale of Inventory should be counted to confirm that employees will be entitled to compensation
assets versus that of shares. the physical inventory agrees with the target and other entitlements such as pensions. If the
target company has a unionized work place the
company’s records. Capital assets such as
Asset Purchase machinery and equipment will also have to terms of the union contract should be reviewed
In most cases an acquirer prefers to purchase be appraised and inspected for their value and to uncover clauses or terms that will negatively
the assets in order to write up asset values expected remaining useful life. affect operations going forward. As part of the
to their fair market value and then have the purchase and sale agreement, the status of the
future benefit of a higher tax base for the Share Purchase target company’s employee relationships will be
purposes of claiming capital cost allowance Vendors normally prefer to sell shares, as the subject to negation between the parties with the
(“CCA”), to thereby reducing future income proceeds (in excess of the adjusted cost base) vendor paying for some of these costs on closing.
taxes payable. Furthermore, by purchasing are generally considered a capital gain, and An important area to examine as part of the
assets, a purchaser only acquires those assets it are taxed more favorably than other forms share purchase is the revenue component.
wants, and is not responsible for any existing, of income. Only 50% of the gain is included The quality of the earnings must be measured
contingent or unknown liabilities of the and reviewed, including who are the
in income. Also, if the shares are those of a
company, but those specifically attached to the “Qualified Small Business Corporation”
clients/customers, and any contracts that may
asset(s) acquired. It is important to determine (“QSBC”), the seller may be eligible to receive be in place, including those with suppliers and
whether any third parties have an interest in up to $800,000 in capital gains ($400,000 of clients. Other issues to consider are economic
the assets, such as creditors or government taxable gains) tax free. dependence on key clients (or suppliers),
bodies. Where land and building are part of the the loss of whom could impact the business.
purchase, a title search should be conducted In a share purchase, the purchaser is in effect The purchaser should request and review a
to identify the owner of the property and stepping into the shoes of the shareholder
summary of sales and gross profit (that agrees
any liens thereon. The purchaser will likely vendor. The purchaser may be responsible for to the financial statements) by customer for
require an appraisal to assess its fair market many different liabilities such as payroll taxes, the past three years for indications of growth
value. Appraisals may also be required to value income taxes, harmonized sales tax (“HST”) or reduction in year-to-year customer sales.
the target’s inventory and machinery and and other. These pitfalls can be avoided by
equipment if these assets form a material part reviewing the target company’s tax remittances Earnings should be adjusted for non-
of the transaction. It is also prudent to have and statements provided by the various
recurring and unusual items such as gains
an environmental assessment of the land to government bodies. The purchaser may also or losses on the disposition of capital assets,
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|
Accounting & Assurance Tax Business Advisory
12
