Selling and Purchasing a Business -- Legal Considerations

SELLING AND PURCHASING A BUSINESS

At Courtney Aarbo (www.courtneyaarbo.ca) we attempt to be proactive in providing some general information that may assist businesses now or at some point in the future. We hope you find the information helpful.

Obviously at some point in the life of a business, an owner may be contemplating selling the business or buying another business.

No matter whether one is selling or buying a business, it is wise to consider the following:

1. Early Planning- particularly when one is selling a business, it is important to get one’s accountant and lawyer involved as soon as possible.

A very important consideration in a sale is for the “Seller” to be able to utilize the $750,000.00 “Small Business Capital Gains Exemption”. At least 2 years before a sale, an owner should consult his or her accountant to determine if the business would qualify. If not, there is a likelihood that steps can be taken to bring the business into line with CRA requirements before the sale. If you don’t qualify this very large tax deduction could be lost.

2. Structuring a Deal- all too often clients will present an agreement that has not been structured properly from their point of view or in their best interests.

One example is how the sale/purchase price is to be paid. There should be a deposit posted. In an asset sale the purchase price should be properly allocated to assets and goodwill from a tax stand point. If the Seller is going to carry some of the purchase price it is crucial that the loan to the Buyer has been properly set up, been properly secured, and things such as personal guarantees for the loan considered.

3. Share vs Asset Sales- there is a major difference from both Sellers and Buyers viewpoint between a transaction where the Seller signs over his or her shares in the corporation, verses selling assets and goodwill. It is extremely important for both sides to consult their accountants and legal advisers on the point, before they commit to a deal. Some of the considerations are; 

•     Business liabilities- in a properly documented purchase of assets, generally speaking the Buyer takes them free and clear of the Seller’s secured or unsecured or unknown creditors. With a share purchase, the Buyer takes over the corporate Seller by becoming the shareholder, but also will inherit any of that corporations problems- known and unknown. Generally it is a bit of a risk for Buyers.

•     Tax issues- if a Seller can take advantage of the $750,000.00 Small Business Capital Gains Exemption by a share sale, that is a clear benefit. A Buyer may rather wish to buy assets so that the Buyer gains ability to depreciate the assets on a yearly tax filing basis.

•     Existing contracts- generally it is easier to assume the business contracts of an existing corporation by buying its shares, as that corporation legally continues to run its business, with the existing contracts. When buying assets this is not the case and there will be a greater need to deal with any existing contracts by having to contact and possibly negotiate new agreements or assignments of old agreements to the new owner.

•     Employees- in a share sale, the corporate employer continues as the employer. Employees continue in their jobs. If the Buyer doesn’t want an employee, special terms may need to be agreed to where the Seller terminates the employee and pays severance, otherwise the Buyer will be responsible to pay full severance sometime in the future. In an asset sale, the Seller no longer runs the business, and generally terminates all employees, paying them severance. It is usually agreed that the Buyer will hire back the employees it wants to keep- but severance will still have to be paid by the Seller. Obviously the issue of employees needs to be carefully addressed in the deal’s negotiation stage, not as an after thought.

4. Conditions of the Deal- often there will be several conditions put in the agreement, which if not fulfilled, will allow the Buyer to not close. It is very important that these conditions be kept to a minimum, and are reasonable from the Seller’s perspective. If not, the Buyer is given an ability to walk away from the deal without the Seller having any recourse. It is very important to the Buyer that critical matters are made conditions.

5. Reviewing the Lease- the premises lease almost always needs to be taken over or negotiated by the Buyer. The lease terms need to be reviewed early in the process. Usually, being satisfied about the lease is a condition of the sale.

6. Non- competition/ Non-solicitation Clauses- these can be critical to both sides. Obviously the Buyer does not wish to buy a business, and find its value diminished by the Seller competing. The Seller does not want to be prevented from making a living in the future. A reasonable compromise of the 2 competing interests needs to be incorporated.

Obviously, the above points only scratch the service of these issues and can only be properly dealt with by a full consultation. We hope you agree however, that it is important to be aware of all of them in any sale/purchase process. The critical piece of advice that we do urge you to take is the need to consult accountants and lawyers early in the process, before mistakes that cannot be corrected are made.

If we can be of further assistance we would be pleased to speak with you.

Gary C. Courtney

Courtney Aarbo Barristers & Solicitors

www.courtneyaarbo.ca

Business Account Collection -- Tips from a Lawyer

BUSINESS ACCOUNT COLLECTION

In small businesses, being paid for ones work, being only partially paid, or having to expand energy and money to collect an account is a huge detriment to ones bottom line. In an effort to minimize your difficulties Courtney Aarbo Barristers and Solicitors (www.courtneyaarbo.ca) is pleased to provide you with;

10 Tips for account Collection

1. If your business is not being ‘paid up front’, then you are in the business of extending credit and you should try to think a bit like your bank.

2. If your business is extending significant credit, have the customer fill out a credit application, which will hopefully contain information about the customer’s address, place of employment, and bank. All this information way be invaluable in later trying to chase the customer for payment.

3. If possible obtain a credit card number with an authorization to use it to pay for the services once completed.

4. If worried about a customer’s credit worthiness do some basic checks on him or her. For example our office or a registry shop can order a ‘Personal Property Registry Search’ at a cost of only a few dollars. This search will show what creditors are registered against the customer and against his or her assets. It will also show registered writs of enforcement by other creditors who have obtained Court Judgments. Obviously doing business with a poor credit risk is to be avoided.

5. If possible prepare a contract with the customer and make sure it is properly signed. The contract should specify the ‘terms of payment’ and what interest is to be paid on overdue accounts. Note: Simply putting an interest rate on the bottom of an invoice (for example 2% per month) is not legally enforceable. An interest rate must be agreed to in writing in a contract in advance of the contract’s performance.

6. Make sure any contract contains a term that the customer will repay to the business any and all costs of collecting an account, including lawyer’s fees and disbursements on a solicitor/ client basis. Hopefully if you need to hire a lawyer to collect an account, the cost can be added to the claim.

7. Be sure to clearly and carefully document on invoices the services which have been done or provided and the charges and credits on the account. Too often unclear accounting results in a customer not paying on a timely basis, or at all.

8. Be sure that any changes to the work being done or product provided is carefully documented, preferably with the customer acknowledging the change in writing. Surprise changes in a final accounting often result in payment problems. If an account has to be sued on to collect an improperly documented change, a judgment may not be awarded by a judge.

9. Keep a complete file reflecting what has been done for the customer. For example memos of important conversations or copies of emails confirming important events provide a good record. This documentation will be very useful in settlement discussions or court proceedings.

10. Sit down with a customer to discuss in a calm straightforward manner any difficulties he or she has with the services or the accounting. Often misunderstandings can be worked through before positions harden on payment. Often a small compromise on an account is much better than a dragged out fight with a customer, sapping your time and energy, and possibly incurring legal bills.

The above points deal largely with account collection before the need to come into a lawyers office. Frankly the most positive outcome for a business is not to have to hire a lawyer for account collection. While we are happy to provide legal services for this purpose, we would prefer to see accounts all paid on time leaving business to retain our services for more positive purposes.

We hope you find the above to be helpful.

Gary C. Courtney

Courtney Aarbo Barristers & Solicitors

www.courtneyaarbo.ca  

Common Contract Format -- Tips from Lawyer for Small and Medium Sized Businesses

Common Contract Format

By: Gary Courtney, Barrister and Solicitor, 

Providing Information to Assist in Business

Most commercial agreements prepared by lawyers, or prepared from a lawyer’s precedent, have six parts, each with their own purpose:

a)         Date

Generally the date of the agreement will be the first thing found in any agreement.  It should be the date the agreement is signed.  It is usually the date the agreement is effective.

From time to time one may find the following term:

“This Agreement dated the 5^th day of May, 2012 to be effective from the 1^st day of January, 2012.”

In other words the term is backdating the agreement.  The above term is much preferred to simply dating the Agreement for January 1^st, 2012, when in fact it is not signed until May 5^th.

There is nothing wrong with the above wording having the effect of backdating an agreement, as long as the agreement was in fact in place on January 1, 2012, but simply took about four months to properly document.

 A problem arises if there was no agreement on January 1, 2012, as in reality the agreement was not struck until May.  In other words we do not have a proper effective date of an agreement that took a few months to document, but we have a fictitious backdating of an agreement reached in May.  In this case the contracting parties may be committing a fraud if for example the reason for backdating is to obtain some tax advantage.

 b)         Parties

The second part of the contract should accurately set out the parties to the agreement. Make sure the name of a corporate party is accurately set out.

c)         Preamble

Most contracts, especially if the document is a lengthy one, will set out a preamble.

The preamble is meant to set out the background for the parties entering into an agreement.  Its purpose is to assist in explaining what will be coming next, i.e., what has been agreed.  It also often contains a standard clause acknowledging the flow of consideration necessary to form a binding agreement.

In addition to the Preamble’s position in the contract document, following the listing of the “Parties”, one can often recognize the preamble by the use of the word “Whereas”.

A typical example is as follows:

“Whereas:

1.         Sally Smith is the owner of 50 shares of A.B.C. Investments Ltd. which she wishes to sell;

2.         John Jones wishes to purchase 50 shares of A.B.C. Investments Ltd.

Now Therefore in return for the sum of $1.00 paid by John Jones to Sally Smith and other good and valuable consideration contained herein the payment and receipt of which is acknowledged:

IT IS AGREED”

d)         What is Agreed

The next part of the typical agreement will generally be the setting out of the main points of the agreement.  If the contracting parties were asked what has been agreed, most or all would be incorporated into this part of the agreement.

Usually this part of the contract will state what is to be done, when it is to be done, and how it is to be done.

This part might state the following:

1.         Sally Smith agrees to sell and transfer to John Jones all her interest and title to 50 shares of A.B.C. Investments Ltd. for a price of $1,000.00, or $20.00 per share.

2.         John Jones will pay to Sally Smith the sum of $1,000.00 or $20.00 per share for the 50 shares of A.B.C. Investments Ltd., which sum will be paid on or before May 31, 2000, by certified cheque payable in trust for Sally Smith to Courtney Aarbo, Barristers and Solicitors, 1131 Kensington Road N.W. (3^rd Floor), Calgary, Alberta, T2P 3P4.

3.         On receipt of payment for the shares Sally Smith will forthwith effect the share     transfer by causing a transfer of the share certificate to John Jones to be effected  and registered on the share register of A.B.C. Investments Ltd.

e)         Standard Clauses

The next parts of a standard agreement are the standard clauses, sometimes referred to as “the fine print”.  The section is typically thought of as the part of the agreement that the parties’ lawyers would likely put into an agreement.  It may be much longer than the rest of the agreement.  The terms are difficult to understand.  Unfortunately the parties often do not read these sections of the agreement prior to signing it.

In the share transfer agreement that we have been using as an example this area of the agreement would likely contain terms covering the following areas:

·         Extensive provisions regarding representations  and warranties that Sally Smith would give to John Jones concerning her having good and clear title to the shares, her having the right to transfer the shares, and even the financial position of the company itself.

·         Detailed particulars of further acts which must be done to effect the share transfer.

·         Conditions precedent to the share transfer.

·         Termination of the agreement.

·         Amendment of the agreement.

·         Interest for late payment.

·         Where notices can be sent.

·         Arbitration of dispute clause.

·         “Standard” closing clauses such as the clause that the written agreement contains the whole agreement.

A further example that most persons can relate to is a mortgage.  Most individuals will review their mortgage, to the extent of the first few clauses setting out the amount borrowed, the interest rate, and the payment terms.  A particularly studious person may review their early payment provision.  With respect to the other 80% of the mortgage, few take the time to review it.

If people did review their whole mortgage, they would find shocking terms, such as that they were supposed to get permission of the mortgage company for renovations, and provide copies of their insurance policies.

Persons in business should be aware that the “Fine Print” generally contains crucial terms which should be reviewed and understood before signing.  In the event the agreement is signed, and one of the “Fine Print” terms comes back to haunt the signatory, there is no defense to a claim based on not having read the contract.

In the real world of business it is difficult to find the time, or have the patience to review all the “Fine Print”.  If the contract is of great importance then likely it will be reviewed by the business’ lawyer, in which case one can often rely on the lawyer to bring any problem to your attention.  Due to cost concerns, it is not always possible to hire a lawyer, but if that decision is made, it will be even more critical for the business person to take the time to review the agreement thoroughly.

f)         Execution

The last part of any agreement is the portion where the parties sign.

For more information contact Courtney Aarbo Barristers and Solicitors at www.courtneyaarbo.ca or info@courtneyaarbo.ca  or phone 403 571-5120.