module 15

Question 1

REBBA defines a “business

Answer 1

as an undertaking carried on
for gain or profit, including any interest in any such
undertaking.

Question 2

The sale of a business may include one or more of the
following components:

Answer 2

• An agreement of purchase and sale for real
  property
• A lease of premises
• A purchase of business assets, such as inventory,
  equipment, and others
• The transfer of the shares of the business
• A combination of any of the above
  The nature of the sale of business can also involve the
  sale of only assets or shares

Question 3

There are consequences for not providing these
statements

Answer 3

These statements include: (1) a profit
and loss statement; (2) a statement of assets and
liabilities; and (3) a statement containing a list of
all fixtures, goods, chattels, other assets and
rights not included in the trade. You will learn
more about these statements later in this lesson.

Question 4

an
affidavit statement signed by the seller under
oath.

Answer 4

In certain circumstances, such as if financial
statements are not available, a listing
salesperson may need to provide a buyer with

Question 5

The business and the real property are separate entities.

Answer 5

Therefore, the salesperson
needs to prepare two separate agreements of purchase and sale – one for the sale of the business and one for the
sale of the real property.

Question 6

A salesperson negotiating the sale of a business on behalf
of a seller must provide the following statements to the
buyer

Answer 6

1. A profit and loss statement for the business for the
   preceding 12 months or since the seller acquired the
   business
2. A statement of the assets and liabilities of the
   business
3. A statement containing a list of all fixtures, goods,
   chattels, other assets, and rights relating to or
   connected with the business that are not included in
   the trade

Question 7

Consequences of not providing the list of items not included in the transaction

Answer 7

If a salesperson does not provide the list of items not
included in the transaction and the agreement of
purchase and sale does not specify which assets are
excluded from the sale, then the fixtures, goods, chattels,
assets, or other rights will be considered included in the
trade

Question 8

Affidavit statements

Answer 8

Sometimes, a seller is unwilling or unable to provide the
profit or loss statement or the statement of assets and
liabilities. In such situations, the listing salesperson needs
to provide the buyer with an affidavit statement, signed by
the seller under oath, stating that the seller will not or is
unable to provide financial statements.
The buyer (or their signing authority) will then sign and
acknowledge that they have received and read a
statement from the seller (or someone acting on their
behalf), which was sworn under oath or affirmed.

Question 9

This affidavit statement sets out the following:

Answer 9

1. The terms and conditions under which the seller
   holds possession of the premises in which the
   business is being carried on.
2. The terms and conditions under which the seller has
   sublet a part of the premises in which the business is
   being carried on.
3. All liabilities of the business.
4. A statement that the seller has made available the
   books of account of the business that the person
   possesses for inspection by the purchaser, or that
   the person disposing of the business has refused to
   do so or has no books of account of the business, as
   the case may be.

Question 10

At the municipal level are bylaws, zoning, and permits

Answer 10

obtain a licence, depending on location and type of
business activity.

• How land may be used
• Where buildings and other structures can be located
• Types of buildings permitted and how they may be used
• Lot sizes and dimensions, parking requirements, building heights, and setbacks from the street

Question 11

At the provincial level, the
Business Corporations Act regulates trade names, the Partnerships Act defines partnership agreements, and the
Employment Standards Act protects workers’ rights

Question 12

At the federal level, both the Income Tax Act and the Excise Tax Act
regulate taxation, and the Canada Labour Code regulates industries under the jurisdiction of the federal government.

Question 13

Business Corporations Act

Answer 13

Business corporations are formed under the Business
Corporations Act. The incorporation process involves
choosing a name for the corporation, conducting a
name search, completing the articles of incorporation,
and filing the application for incorporation with the
Ministry of Public and Business Service.

Question 14

The Partnerships Act identifies two categories of
partnerships a salesperson may encounter when
selling a business—limited partnership and general
partnership-

Answer 14

The Partnerships Act identifies two categories of
partnerships a salesperson may encounter when
selling a business—limited partnership and general
partnership

-A limited partnership, usually created for investment
opportunities,

Question 15

Employment Standards Act

Answer 15

-Continuity of
employment

Employee records

Termination and
severance of
employment

Question 16

Income Tax Act: Capital gains

Answer 16

A capital gain is the gain from the disposition of capital
property, a percentage of which must be added to
taxable income on disposition of the asset.
A seller may be affected by capital gains deductions. A
salesperson should advise the seller to consult a thirdparty professional prior to entering into an agreement.

Question 17

Excise Tax Act: Harmonized sales tax (HST)

Answer 17

The harmonized sales tax (HST) applies to the sale of
all goods and services.

Question 18

Personal Information Protection and Electronic Documents Act (PIPEDA)

Answer 18

The Personal Information Protection and Electronic
Documents Act (PIPEDA) provides that personal
information cannot be collected, used, or disclosed in
Canadian commercial activities without the informed
consent of individuals providing such informatio

Question 19

Canada Labour Code

Answer 19

These standards apply to full-time and
part-time employees who work in:
* Banking
* Federal Crown Corporations
* First Nations Band Councils
* Grain
* Interprovincial and international transportation
* Telecommunications and Broadcasting
* Uranium and nuclear energy production

Question 20

Services Provided to Seller Clients

Answer 20

Note specifics about the business :

To offset
any potential issue, a salesperson should:
* Create a detailed list of items of fixtures, goods,
chattels, and other assets such as contracts with
suppliers included in the trade, and a separate list
of items excluded from the trade
* Review the lists with the seller and confirm their
accuracy

Question 21

Create and implement a marketing plan

Answer 21

A salesperson should create and implement a
marketing plan specific for business trades, starting
with a market feasibility study. This type of study may
include the following elements:
* Marketing analysis: trends, demand, space
inventory, absorption rate, vacancy rate,
competitors
* Demographic studies
* Location analysis: accessibility, proximity to
amenities

Second, the salesperson should develop a buyer
profile; for example, what type of buyer would be
interested in purchasing the business.

Question 22

Marketing considerations

Answer 22

Marketing a business to prospective buyers may be
challenging because:
* A seller may not want employees, customers, or
competitors to know they are selling the business
* A salesperson may not be able to place a “For
Sale” sign on the property

Question 23

Visit to the business

Answer 23

may be challenging
because the seller may be concerned about:
* Alarming the employees, who may begin to search
for other jobs
* Disrupting ongoing business operations (for
example, business customers may think the
service will change)
* Making the listing public knowledge beyond the
scope of interested investors

Question 24

Present and explain agreements

Answer 24

An agreement of purchase and sale for real
property; in this case, the seller is selling both the
business and the real property that houses the
business

Question 25

Present and explain agreements

Answer 25

An agreement of purchase and sale for real property; in this case, the seller is selling both the business and the real property that houses the business

Question 26

Provisions

Answer 26

Examples of provisions included in the agreement: * Hold all information confidential and use such information solely for the intended purpose * Return all documentation at the conclusion of negotiations (or on demand) * Make no copies or retain any information whatsoever * Not disclose information to any other parties (unless the agreement also binds such parties)

Question 27

Services Provided to Buyer Clients

Answer 27

first determine the buyer’s interests by asking the buyer about the following: * Type of business they want to buy * Location of business * Affordability (for example, available funds for investment)

Question 28

Draft agreement of purchase and sale

Answer 28

Examples of conditions to include for buyers include: * Obtaining a property inspection * Obtaining additional financing * Reviewing all legal, title, and zoning matters

Question 29

Obtain necessary documentation from a seller

Answer 29

* Financial records * Lease documents * Inventory of equipment and other assets * Utility bills * Building service contracts * Insurance policies

Question 30

Salesperson Compliance Requirements

Answer 30

Fairness and honesty Fairness and honesty Conscientious and competent service Providing opinions Disclosure of interest

Question 31

financial statements of the business, which include an income and expense statement

Answer 31

profit and loss statement

Question 32

balance sheet,

Answer 32

as a statement of assets and liabilities, to assess the revenue generated by the business.

Question 33

Income and Expense Statement

Answer 33

Businesses generally include three key elements in the income and expense statement: * Revenue by sales * Operating expenses * Cost of goods sold (cost of merchandise) The income and expense statement include the revenue from all sources and the expenses incurred when generating that revenue to arrive at income before income taxes, also known as net operating income. The income and expense statement begins with gross revenues earned from which expenses are deducted until the bottom line is reached, either profit or loss. You would then use this statement to: * Estimate the sale price of the business * Estimate the profitability of the business * Demonstrate to buyers if the business is viable

Question 34

Balance Sheet

Answer 34

A balance sheet, also known as a statement of assets and liabilities, summarizes a company’s assets and liabilities, provides an indication of business stability, and helps assess financial risk for investors. A large corporation might create a consolidated balance sheet, which consists of the balance sheet of the parent company and subsidiary balance sheets of operating subdivisions. All debits must equal all credits in the accounting system, so the balance sheet includes the following three components:

Question 35

asset

Answer 35

goodwill

Question 36

Liabilities: Debts or obligations a business owes that are payable on a fixed or determinable future date. Liabilities are generally current or non-current

Question 37

* Shareholder’s or owner’s equity: Investment in the company, plus the amount of undistributed earnings.

Question 38

* Shareholder’s or owner’s equity: Investment in the company, plus the amount of undistributed earnings.

Answer 38

Audited and unaudited statements, prepared by a seller’s accountant, indicate the financial status of the business to potential buyers. The main difference between an audited and an unaudited statement is the depth of review or research conducted by the accountant. Audited statements provide an accurate picture of the financial status of the business; unaudited statements, such as the review engagement statement and notice to reader report, may only contain partially reviewed information.

Question 39

Notice to Reader Report

Answer 39

Another type of unaudited statement is a notice to reader report, a basic and common financial statement prepared by a seller’s accountant. This statement contains information on the financial health of the business. However, the accountant does not provide a professional opinion. They only include a notice on the first page that states, “On basis of the information provided to me by the owner of the business, I have prepared the financial statements for the year. I have not audited, reviewed, or otherwise attempted to verify the accuracy or completeness of the information in these financial statements.”

Question 40

Key Aspects of an Asset Sale and a Share Sale

Question 41

Asset sale

Answer 41

An asset sale is a transfer of business assets, both tangible (for example, land, buildings, equipment, inventory) and intangible (for example, business name, clients, contracts, intellectual property, goodwill). If only physical assets are being sold, the seller normally assumes responsibility for any existing debt (for example, accounts payable) but retains all accounts receivables. The buyer acquires the remaining assets, such as equipment, inventory, and goodwill.

Question 42

Share sale

Answer 42

share sale occurs when shares of a corporation are being sold. In this type of sale, the buyer assumes all assets and liabilities. The buyer will have the use and benefit of items such as the company name, copyrights, leases, and real estate, unless otherwise agreed. The seller passes the shares of the corporation to the buyer, who replaces the seller as the owner. The seller must also report capital gains.

Question 43

Asset sale: * If a seller sells an asset for more than what they originally paid for it, the difference (the profit) is taxed. The seller identifies the capital gains tax on their next tax return and pays an income tax on that amount.

Question 44

Share sale: * If a seller sells a share, they may be eligible for a capital gains tax exemption. For a buyer, this may mean paying a lower purchase price for acquiring the shares than for acquiring the assets. * If a buyer is buying shares, they will assume all assets and liabilities of the corporation

Question 44

Share sale: * If a seller sells a share, they may be eligible for a capital gains tax exemption. For a buyer, this may mean paying a lower purchase price for acquiring the shares than for acquiring the assets. * If a buyer is buying shares, they will assume all assets and liabilities of the corporation

Question 45

Review a lease

Answer 45

* Whether the lease can be assigned * Under what conditions the assignment can occur * The remaining term of the lease, including any provisions for renewal * The terms, benefits, and restrictions contained in the leaese

Question 46

Most leases contain clauses stating the following: * Written consent from the landlord is required for subletting the premises or assigning the lease * The landlord may not unreasonably withhold consent * If consent has not been given and the tenant sublets or assigns the lease, the landlord reserves the right to terminate the lease * If consent is given for subletting, the original tenant will remain responsible for all the provisions of the lease if the subtenant defaults

Answer 46

subletting

Question 47

Inventory valuation

Answer 47

Inventory valuation tells a buyer if there is any additional amount to be paid for the inventory associated with the sale. Inventory is itemized in the sale of business agreement. When a transaction is about to close, the seller and potential buyer do an inventory count and verify the value of the inventory as stated in the agreement of purchase and sale. Either the seller or the buyer may request this valuation by providing written notice to the other party. If written notice is not provided, neither the seller nor the buyer may dispute the final amount of valuation of inventory.

Question 48

Operating Licence

Answer 48

An operating licence is a permit from a government authority to buy and sell goods and services. A business without a valid operating licence is of no value to prospective buyers. * To help the buyer obtain the licence by including conditions in the offer for operating licences to be transferred by the correct governing body to the buyer * To determine the length of validity of the licence; a buyer may decide not to purchase the business if the licence is about to expire

Question 49

Trade Unions

Answer 49

Acquiring a business where some or all employees are unionized may complicate a buyer’s role in the following ways: * The buyer may have to assume the trade union contract as part of the business sale. If a business has a major change in ownership, part of the terms of the sale may be the assignment of the trade union contract to the new owner. If the business sale documents do not specify, the buyer may have to inspect the contract itself. A good union contract could be added to the value of the company’s assets as an intangible asset. Sometimes, the buyer and the trade union may mutually agree to replace a previous contract with a new one. * The buyer cannot make any modifications to the employees’ terms and conditions. Should the buyer make any unwanted modifications, the employees may choose to strike. This situation would be an example of a bad union contract that may cause complications for value and termination of employees.

Question 50

Intellectual Property Use Agreement

Answer 50

Intellectual property is a legal right for a person to use a certain name or product in the business. Anyone possessing an intellectual property use agreement may use the name or the product stated in the agreement as part of their business. Having the rights to a piece of intellectual property may increase the financial value of the business. When reviewing a business on behalf of a buyer, a salesperson needs to confirm that the business owns or has a valid licence for all key intellectual property and technology it uses.

Question 51

Distribution Rights Agreement

Answer 51

Distribution rights allow the owner of those rights to legally sell a supplier's products or services within a specified geographic area. To sell a supplier's products or services, a legal agreement, known as the distribution rights agreement, must be obtained from that supplier. Exclusive distribution means the supplier only allows one distributor within a specified geographic area to sell their products or services. This means no one else can sell the products or services in the area except the distributor to whom the supplier has given the rights and authority to do so. If another entity wanted to sell that particular product or service, that entity would need approval from the person with the rights to sell that product or service. Exclusive distribution increases the value of the business.

Question 52

Retention of Employees When Selling a Business

Answer 52

Key employees are those considered essential to the operation of the business. Without key employees, a business cannot run, which is why there is a value attached to them. For example, a well-known, world-class chef would be the most important employee of a restaurant. The chef would add value to the business if the business were to be sold and the chef decided to continue working at the restaurant.

Question 53

Seller Financing

Answer 53

The salesperson informs the buyer about other ways of securing financing – namely, a seller financing agreement. Buyers who are unable to secure necessary funds from traditional lending institutions may even approach the seller for assistance. A seller financing agreement is formed when the seller agrees to finance a portion of the purchase price to facilitate the sale. This agreement benefits the buyer because it allows them to proceed with the purchase

Question 54

Earnout

Answer 54

is a method of financing the sale of a business predicated on actual performance. An accountant would deduct the down payment on the business and then calculate the balance purchase price based on the actual performance (that is, productivity) of the business after closing.

Question 55

Seller Financing: Types of Earnout

Question 56

Base period earnout

Answer 56

In the base period earnout method, additional payments are made every year in excess of the balance due on the purchase of a business. These payments are paid as a proportion of the increase in profits produced from the operation, over and above those profits derived in a particular base year.

Question 57

In the base period earnout method, additional payments are made every year in excess of the balance due on the purchase of a business. These payments are paid as a proportion of the increase in profits produced from the operation, over and above those profits derived in a particular base year.

Answer 57

This method is similar to the base period earnout except that additional payments over fixed debt are calculated on a proportion of the year-to-year increase, capitalized at the agreed rate. In other words, the profits must increase each year, relative to the previous year, for a payment to become due.

Question 58

Cumulative earnout

Answer 58

The cumulative earnout method is based on the total increase in earnings over the base year for the number of years contracted. This amount is then paid to the seller at the expiration of the

Question 59

Direct Capitalization Method

Answer 59

The direct capitalization method is used to estimate market value because it is market-driven and has limited assumptions. This method is most frequently associated with small income investment properties The use of capitalization in estimating value assumes a relationship between the income that a business is capable of earning and its value at any given time. In the direct capitalization method, the net operating income (NOI), derived from an income statement and generated by the business, is used to determine its value.

Question 60

Gross Profit Multiplier Method

Answer 60

The gross profit multiplier method represents the relationship between sale price (value) and gross profit and is derived from sales of comparable businesses. It is typically used if capitalization is not possible and gross income profit is the only available figure for comparable sales

Question 61

Discounted Cash Flow Method

Answer 61

The discounted cash flow method uses a pre-determined interest rate to bring all future cash flows to the present value (known as discounting) to estimate the value of a business. Cash flow is the money expected to come into the business, which defines an investor’s expected return. Often considered more accurate than other methods, this method uses projected cash flows over a period of time to value a business. The interest rate used for discounting takes into consideration the risk and the time a buyer needs to recover their investment.

Question 62

Adjusted Book Value and Asset Valuation Methods

Answer 62

The adjusted book value method is a subset of the asset valuation method and the methodology may vary in the marketplace. These valuation methods are normally associated with the sale of a business and are determined through analyzing component parts of the business. The exact combination of components and their relative importance is often determined by the negotiating stance of the parties and the type of business involved. Emphasis is typically placed on actual values of equipment, fixtures, inventory, and other assets. Value associated with the business itself may or may not be included.

Question 63

As you have learned, the four main methods used for valuation of a business are: 1. Direct capitalization method 2. Gross profit multiplier method 3. Discounted cash flow method 4. Adjusted book value/asset valuation methods