Paying closing costs and transaction costs with business proceeds

August 15, 2024

by a searcher from University of Victoria in Vancouver, BC, Canada

I'm looking for some confirmation that what I'm thinking is possible and not entirely uncommon, and/or would welcome any alternative approaches. Given the large property transfer tax, the decision as to how I might best handle this has more considerable implications than previous deals I've worked to structure. This is in Canada, but I imagine the mechanics would be similar in America.

My transaction accountant has explained that the business can pay for the transaction costs, so I'm trying to figure out the actual logistics of this.
- Accounting & Legal ~ $30,000
- Bank Fee ~ $25,000
- Environmental Survey - $4,000
- Property transfer tax ~$100,000
Total = ~$160,000 - $180,000

It's my current thinking that these are fine to just be additional capital contributed prior to closing and treated as as shareholder loan, but then repaid by the business as it's able to. If needed, this could be convertible debt for more security. The bank has restrictions against repaying our initial shareholder equity, but I'm not yet sure if these will be caught in those restrictions. I don't want the fees to be treated as equity and to dilute ownership further.

Other options would be expanding the vendor note, mezz debt, or flexing the business LOC a bit. All less ideal in my opinion.

Does anyone have any other ideas about creative ways to handle this?

Reply by a searcher
from Concordia University in Toronto, ON, Canada

My accountant checked the CRA guidelines for transaction expenses and split the expenses in two parts: 1) chargeable to the business and 2) a shareholder obligation. The second part paid by the shareholders kept as the cost of the share purchase, that the shareholders will recover when they sell the shares as a cost basis in capital gains calculation (so it did not dilute the equity - but there is no means to recover them until you sell the shares). The first part if incurred (or invoiced) after the closing, paid directly by the business. Those incurred (or paid) before the closing recorded as a shareholder advance and paid later over the first year.
Hope this is helpful.

Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

1. Such expenses are paid from the business
2. You can give the business loan and have the business repay with bank's knowledge
3. I do not understand how this will dilute equity if you record it as equity.
4. In acquisitions, there is sources of funds and use of funds, both equal. The total capital to be raised, i.e. use of funds, is equal to price to seller + closing expenses. Above items will be part of closing expenses. Your sources of funds will be your equity + debt + seller financing. So,.
(equity + debt + seller financing) = (Price + Closing fees to bank + buyer's closing expenses)

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