Buying an existing business may be a great opportunity if your dream is to be an entrepreneur, but you want to avoid some of the risks that go along with starting a new business. Keep in mind that no business, new or established, is free from risk, but the benefit of jumping into an already established business provides sustainability as the marketplace has already been tested.
Taking over an established business can sometimes involve more work than starting a business from scratch. Take your time to ensure that buying a business is the right option for you, and when you are ready to transfer ownership, Ontario Business Central can help make it an easy transition.
Before you take ownership of your business
If you are interested in buying an existing business, it is important to do your due diligence before you sign any purchase agreement. As part of reviewing an existing business, it is important to complete the due diligence history of the business with professionals such as CPAs and corporate lawyers to assist you. Common due diligence requests from you to the seller include a copy of the financial statements, typically somewhere between 3 and 5 years, tax records for both the business and the individual as the owner, a list of assets and liabilities, suppliers, debts, litigation history, receivables and a number of other items.
This assists you in determining the viability of the business you are purchasing. You will also want to review the year over year sales to understand the peaks and valleys of the business, along with any seasonal factors.
Normally when people are purchasing a business, they do a number of corporate searches, including the Profile Report, a PPSA search, bankruptcy, bank act, official receiver and litigation searches. This provides a third party view of the structure of the business, it’s owners including directors, officers, history, debts, and liabilities. Shareholders of the corporations are not listed publicly. It is very important to gain the listing of the shareholders as they may not be the same as the directors or officers of the corporation.
You may, if the opportunity arises to sit down with some of the employees that have been with the company for some time, to get an idea of the culture of the business and to gauge their thoughts on the change of business owners. If the general consensus among employees is that they are opposed to the business being sold and changes of ownership happening, it may create a hostile environment, so knowing where they stand ahead of time can help you better decide how to proceed.
Remember, it is not just about how the business exists at the moment; it’s about having a succession plan for what happens next after you have bought it.
What are the pros and cons of buying an existing business?
In deciding whether or not to buy an existing business, it is a good idea to weigh the pros and cons that can come into play.
- Established customer base: When you take over an existing business, one of the benefits is that it already has customers. Of course, you will always want to continue to grow the customer base, but having some right off the bat gives you a good foundation to start.
- Goodwill: The value of a company that is generated from its brand and reputation is known as the ‘goodwill’ of that business entity. If the business you are buying has developed a great reputation, you will benefit greatly from this.
- Immediate cash flow: Because of the business’ established customer base and goodwill, you will have sales and cash flow pretty much instantly after taking ownership of your business.
- History: Through everything from the bank statements to the tax filings, you will be able to see the history of the company. You will get a good idea of how much income you can expect to generate as your return on investment, what the busiest times of the year are and what products are the best sellers.
- More expensive: You are almost always going to pay more for an established business than starting from scratch. You will have to determine if the benefits that come along with the business outweigh the higher cost.
- Change of ownership: Before jumping in, consider that a transfer of ownership can sometimes cause push-back from employees or customers. Sitting down with employees can give you an idea of any concerns they might have and how you might make this change in ownership easier.
- Established culture: Along with ensuring a smooth transition for employees, it is important to evaluate the company’s established culture and see if it fits with the vision in your succession plan of what you want the company to look like. If it does not, is it possible to make that change?
Making the change to the business documents
Depending on how the business you are buying is registered, there would be different ways to transfer business ownership and the documentation into your name.
If the business is registered as a small business, including Sole Proprietorships and General Partnerships, most jurisdictions in Canada do not allow the individual’s name to be changed on a registered business. In this case, you can simply register a new licence or incorporate and have the current owners registration cancelled. Depending on the jurisdiction, you may need to have a written letter of consent from the existing business owner to use the same business name.
There are two ways to purchase a corporation. The first is a share transfer, where the new individuals purchase the corporation from the existing owners. This option is typically preferred by the seller, where the buyer assumes all debts and obligations of the business, both known and unknown. The business carries on without interruption and the new owners simply replace the previous owners.
In this instance, filing a Notice of Change updates the directors and officers on file for the corporation. The date of incorporation remains the same, so you are able to keep the history of the corporation. Should the shareholders agreement need to change, this would be done privately through a corporate lawyer.
The second option is an asset purchase, where the new owners purchase the assets without purchasing the corporation. This is where you would purchase assets of the business, without buying the actual business itself. Many buyers prefer this, as it helps limit their liabilities, they can pick and choose which assets they wish to buy and they aren’t taking on the debts and obligations of the business. In terms of taxes, the purchase of the assets can be deducted over a period of several years.
If you wish to register a new Sole Proprietorship or General Partnership to purchase the existing business, here is the link:
If you have permission from the current owner to cancel the existing registration under their personal name, here is the link to do so or you can pass on to current owner for them to do:
With a share agreement where you are keeping the existing corporation as part of the purchase, select this link to change the directors of the purchased corporation and other details such as address changes for the corporation:
If you wish to register a new corporation, here is the link:
Ontario Business Central can assist with any of these services, getting everything done for you on the same day, so you can get started on your new business venture!
Changing other accounts
After finalizing the changes to your business documents, you will want to update any other accounts associated with your new business. This can include business bank accounts, credit cards and Revenue Canada accounts.
In some instances, the bank may require the old accounts to be closed and new ones opened with the new owner’s name. Regardless of whether you’re opening brand new accounts or changing over the existing accounts, the bank will want to see documentation showing that you are the owner/director of the business and that the old owners are no longer being listed on your accounts.
When it comes to Revenue Canada accounts, depending on how the business is registered will dictate whether new accounts will need to be set up or if you can take over the existing ones. For Sole Proprietorships and General Partnerships, any Revenue Canada accounts are connected to the business owners personally, through their SIN. This means that no matter who takes over the business, those accounts will always be linked to the original owners. In this case, you would set up a new Business Number (BN), HST, Payroll, or any other accounts needed. The old owner will want to contact Revenue Canada to cease any accounts they are no longer using; otherwise, they will be expected to continue submitting filings.
Corporations register with Revenue Canada differently since they are considered separate entities from their owners. Because of this, the accounts are linked directly to the incorporated business and not to the owners. If this is the case, setting up new accounts would not be needed, and you can simply take over the existing ones. You will need to provide proof of the ownership changes in order to add yourself to the account and remove the old owners. This can be provided in the form of a completed Notice of Change or a Profile Report for the corporation.
Do you want to sell your business?
There are many reasons why you may be looking to sell your business. Perhaps it has grown in value, and you want to capitalize on your gains, maybe you are interested in starting a different venture, or it could be that you’re looking towards retirement. No matter what the reason, if you sell your business, you will want to be sure that your name is removed from all business documents and accounts, so the business’ liability rests with the new business owners.
After the ownership transfers hands, both the seller and buyer should do their part to ensure that the transfer of business ownership is completed fully. As the seller, it should not be assumed that the new owner will know how to make these ownership changes. Suppose you are unsure about whether your name has been removed from a business or corporation. In that case, you can order a Document Replica for Sole Proprietorships or General Partnerships or a Profile Report for incorporated businesses to see what is listed on file after you have completed the change of ownership.
Buying an existing business is a great opportunity to become an entrepreneur using an established company as a starting point. When you are ready to get started, Ontario Business Central can help with filing ownership changes to your documents.
At Ontario Business Central, our commitment is to assist entrepreneurs as they build and grow their successful businesses. If you have any questions about how to take the first steps to start, please reach out to our helpful and knowledgeable staff.
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Ontario Business Central Inc. is not a law firm and cannot provide a legal opinion or advice. This information is to assist you in understanding the requirements of registration within the chosen jurisdiction. It is always recommended, when you have legal or accounting questions that you speak to a qualified professional.