Should the purchaser of a dental practice buy shares or assets? Let’s look at a summary of some of the tax issues.
When you purchase assets, cash in the vendor’s bank account, the vendor’s accounts receivable or bills owing by the vendor are generally excluded from the deal.
In a share purchase, the price reflects the value of the business as a whole, rather than the value of its individual assets. When you purchase shares, you become the shareholder of the corporation. The corporation is a separate legal entity, and it owns all the assets and owes all the debts including any corporate taxes, payroll taxes and suppliers’ bills.
Listed below are the advantages and disadvantages for each method of acquisition.
Purchase of Assets:
– Ability to negotiate the allocation of the purchase price among the assets acquired (goodwill, equipment, dental supplies, etc.). The negotiated allocation will determine the future tax write off available to you the purchaser. Certain types of assets, such as inventory, has more favourable tax write off than dental equipment, leasehold improvement or goodwill; and
– The purchaser is usually not responsible for any of the vendor’s outstanding debts or bills. The rare exception is the possibility of severance associated with the termination of employees who may have worked for the vendor. Consult your lawyer on this issue.
– Normally, you will have to pay a higher purchase price for assets because of the higher tax write off available; and
– You may also have to pay the Goods and Services Tax (GST) and or Ontario Retail Sales Tax (PST), which are levied on certain items. This will be in addition to the “purchase price”.
Purchase of Shares:
– As a rule, the vendor is willing to accept a lower purchase price as the vendor could possibly escape taxes on the sale, due to the $500,000 lifetime capital gains exemption.
– No GST or PST is payable when you purchase shares.
– The corporation is liable for all its disclosed or undisclosed debts including those contingent debts that could arise based on future events.
– There are very limited tax write offs.
Buyers usually want to buy assets as they receive certain tax deductions. Sellers usually want to sell shares as they pay less tax when they sell shares as opposed to assets. Specifically, if shares are purchased, the price will probably be reduced. Usually a compromise is made. Most valuations or appraisals prepared by leading business brokers to the dental industry are based on assets and not shares.
Understanding what you are buying is rather important as it has legal and tax implications. More importantly, it affects the true after tax amount you will pay as a purchaser. Work closely with your lawyer and accountant to ensure all aspects are in order.
Interested in knowing the seller’s thought process? Review my next article “Selling Your Practice – Different Tax Angles To Consider” appearing in the next issue of The Professional Advisory.