Whether you want to sell your existing business or buy another, business acquisitions are complex transactions, which require proper preparation and assistance from qualified professionals to minimize the risk of problems.
In my practice I am sometimes contacted by individuals who have already either sold or purchased a business without having obtained proper legal or tax advice at the time of the sale. These individuals contact our office seeking help because they are now encountering difficulties, usually with Canada Revenue Agency (CRA) or the person on the other side of the transaction. Sadly, most of their woes could have been prevented or greatly minimized had they obtained advice from qualified legal and accounting professionals at the outset.
This article discusses some key issues that a prospective seller or purchaser need to consider when buying or selling a business, as well as the importance of engaging qualified professionals to assist.
Preparing for a Sale:
Regardless of whether you are selling assets or shares, the following points are important when getting ready to sell or buy a business:
- Get a business valuation
One of the first things a business owner should do is obtain a realistic idea of what the business is worth from an objective, independent source, such as a reputable accounting firm or business broker. A professional valuation will give you an idea of what you can expect to net from the sale. It will also tell you your business’s position in the market and point out its strengths and weaknesses. This will give you an opportunity to correct any issues before putting it on the market.
- Get help, and get it early: Start building your team of trusted advisors
If you don’t already have a team of lawyers and accountants who are skilled in mergers and acquisitions, then now is the time to start your search. Depending on the nature and size of your business, you may also wish to obtain the assistance of a business broker to help you through the transaction. If you are a purchaser, it is important that you also have a team of professionals assisting you. This is especially important during the due diligence phase of a transaction, during which a thorough investigation and evaluation is made of the company to be purchased. This investigation reveals crucial information about the company’s health and, ultimately, its value.
- Get your office and records in order
- A clean, organized and orderly place of business gives the impression of a well run enterprise. If your business operates out of an office or shop, get the place in tip top shape as you would your own home if you were trying to sell it.
- Are your legal matters and documents in order? Get your minute book up to date; ensure that all permits and licenses are in place; and ensure that you have copies of material contracts such as leases, customer and vendor contracts readily available. A prudent purchaser will examine all of these.
- Are your accounting records in order? It is common for buyers of a business to require at least three years’ worth of financial information. Buyers will form a more favorable impression of your business if they are given formal and accurate statements that have been prepared or approved by your accountant rather than informal statements that are generated internally.
- Protect your information
If you are selling your business, make sure that you have entered into a binding and enforceable Confidentiality and Non-Disclosure Agreement with your prospective purchaser. During the due diligence process, you may need to disclose classified information to the other party, including client lists, marketing strategies, financial information and employee salaries. In the event that the sale does not proceed, Confidentiality and Non-Disclosure Agreements minimize the risk of the purchaser disclosing your confidential information to a competitor or using it themselves to establish a business that is competitive in nature.
Drafting the Transaction Documents
An effectively negotiated and well-drafted acquisition agreement is a critical step in the purchase or sale of a business. It should formally capture all of the terms and conditions of the deal. Because of their detailed nature, the negotiation and drafting of the acquisition agreement and related documents demand extreme care and attention by the lawyer. The lawyer must take care to consider various areas of law which could affect the parties involved, including tax, employment, corporate, securities, and environmental law, as well the language typically used in drafting agreements and tested in the courts. Properly drafted transaction documents should address the following important issues:
- Representations, warranties, and indemnities
- Assignment of leases and other material contracts
- Non-solicitation and non-complete provisions
- Harmonized sales tax (HST) and other tax matters
- Due diligence matters, including Personal Property Security Act (PPSA) and bankruptcy searches
- Outstanding amounts owing to WSIB
- Price allocation
- Post closing obligations
Some common issues that buyers or sellers encounter when they do not obtain proper legal or tax advice in connection with their transaction include:
- Canada Revenue Agency (CRA) or some other governmental department going after the new operators of a business for payment of outstanding taxes or other monetary obligations that arose during the time that the previous owner ran the business;
- A seller has agreed to the purchaser paying the purchase price over a period of time in installments. The seller has failed to properly structure the payment arrangement and the purchaser is not meeting the payment obligations;
- A seller has sold the business to a purchaser and, to the dismay of the new purchaser, the seller has, directly or indirectly through another party, set up a competing business nearby; and
- The business is not nearly as lucrative as the seller represented to the purchaser at the time of the sale.
Worth the cost? Absolutely.
From a practical perspective, owners involved in the purchase or sale of a business may be hesitant to incur the cost of involving legal and accounting professionals in the transaction, but it is a prudent investment to make. The value a good lawyer can add is helping business owners prevent or minimize future problems by avoiding misunderstandings and unintended legal repercussions that may arise during and after the transaction and be costly to resolve. Even when a smaller business is involved, it is recommended that business owners at the very least consider meeting with a lawyer before beginning negotiations.