Risks of Buying an Existing Business in Alberta and How to Reduce Them

Buying an existing business can be faster than starting from scratch, but you also take on its history. The customers, staff, lease, equipment and records come with it, and so can problems you cannot see from the outside.

This article walks through the common risks, the Alberta searches that can help you check what the seller tells you, and the contract and tax points that reduce surprises. It is general information, not advice on your particular deal.

This article covers the law of Alberta.

Common risks when you buy a business

Most problems in a business purchase come from something you did not know or assumed. These are the ones buyers most often worry about.

• Hidden debts, or security interests that other parties have registered against the business or its assets.
• A lease that cannot easily be transferred, is close to ending, or has terms you have not read closely.
• Obligations to employees, which are worth confirming before you commit.
• Financial statements that overstate revenue or understate costs.
• Customers or contracts that depend on the seller personally and may leave after the sale.
• Unexpected tax, including GST on the sale itself.

Without an election, each property and service in a business sale is treated as a separate supply with consideration allocated to it, so GST (5% in Alberta) can apply to the taxable parts. Alberta has no provincial sales tax. Which of these risks matter most depends on the business and on how the deal is structured, so it is worth confirming with a lawyer and an accountant.

Asset purchase or share purchase

In an asset purchase, you buy the business property and operations. In a share purchase, you buy the company that owns them, so you take the company as it is, with its history. The structure affects your risk, your tax and your financing.

Without an election, each property and service in a business sale is treated as a separate supply with a price allocated to it, so GST (5% in Alberta) can apply to the taxable parts. Alberta has no provincial sales tax.

If you plan to use the Canada Small Business Financing Program, note that it does not finance share purchases or assets acquired by a holding company, so a share purchase of an Alberta company cannot be funded this way.

Searches that test what the seller tells you

Alberta Corporate Registry searches are requested through a registry agent. Current and historical searches can show the registration date, owners, directors and legal addresses, and they cover corporations, partnerships, trade names and incorporated non-profits. A certificate of status confirms status as of a given date only, but certificates of status are not available for trade names and partnerships. The agent charges a government fee plus a service fee.

A Personal Property Registry search can be run by business debtor name, or by serial number for vehicles, trailers, aircraft, boats and similar items. A search returns an exact match, an inexact match, no match, or both exact and inexact matches. For inexact matches, you may need to search the inexact name again or search the specific registration number, and questions about a result go to the party that registered the interest.

These searches check some of what you are told. They do not replace reviewing the lease, the financial records, the staff arrangements and the contracts yourself.

Contract and financing protections

The purchase agreement is where you turn due diligence into protection. Buyers commonly ask for the following, and a lawyer can tailor them to your deal.

• Statements from the seller that the financials, debts, lease and contracts are accurate.
• A promise to compensate you if those statements turn out to be wrong.
• Conditions that must be met before you have to close, such as landlord consent.
• Part of the price held back until problems have had time to appear.

Tax terms belong in the agreement too. If a valid GST election is made, no tax is payable on the supplies under the agreement, but tax is still payable on a taxable service the supplier will render and on a taxable lease, licence or similar supply of property.

If you need financing, the Canada Small Business Financing Program can finance the eligible assets of an existing business, capped at the lower of the purchase price or the appraised value of those assets. Eligibility is generally limited to businesses with gross revenues of $10 million or less, and farming businesses are excluded.

What to do next

• Decide whether you are buying assets or shares, and why.
• Ask for the financial statements, the lease, staff lists and key contracts.
• Order Corporate Registry and Personal Property Registry searches through a registry agent.
• Ask an accountant to review the numbers and the GST treatment.
• Have a lawyer draft or review the agreement before you sign.

Frequently asked questions