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