Are you thinking about buying a business?
After you have identified a business that you are interested in buying, whether that be a standalone business, a business with multiple locations, a business with a variety of operations, or a franchise, the earlier you contact a lawyer the better. Initial discussions with your lawyer can set the framework for the transaction and help you identify important issues that should be considered.
Prospective purchasers often negotiate the basic terms, or “business terms”, of the transaction directly with the seller and may consult with their other professional advisors, such as accountants or business advisors, during this initial negotiation stage. Once the business terms of the transaction have been settled, purchasers will seek out their lawyer to begin preparing the agreement.
During this negotiation stage, avoid putting anything in writing before you consult a lawyer. For example, a simple exchange of emails and correspondence may create legally binding terms. In addition, entering into agreements without consulting a lawyer may impede an efficient and effective transaction. All documents, emails and correspondence should contain clear statements that you do not intend to create legally binding terms until you sign an agreement that has been reviewed and approved by your lawyer.
A lawyer with experience in mergers and acquisitions will be able to help you structure and negotiate the terms and conditions of the transaction in an unambiguous and comprehensive manner. In addition, your lawyer will assist with completing the legal due diligence necessary to provide you with the information before buying the business and to protect you from unexpected liability afterwards.
Important considerations when buying a business
Structure of Transaction
The purchase of a business may be accomplished either through the purchase of shares in the corporation which owns the business (a “share purchase”), or the purchase of the assets of the business (an “asset purchase”.) In an asset purchase, the purchaser identifies the assets and liabilities it agrees to acquire. This is fundamentally different from a share purchase where the purchaser indirectly obtains all the assets and liabilities of a business by acquiring the corporation which operates that business. Your lawyer should be able to help you weigh the pros and cons of each method.
Preliminary Documents
Prior to entering into a legally binding agreement to purchase a business, the vendor and purchaser could consider setting out their intentions in the form of a preliminary document. An example of this type of documents includes:
- A letter of intent (a non-binding letter expressing interest in and setting out the key terms of purchasing or selling a business);
- A term sheet (a non-binding record of key terms that have already been agreed upon);
- A confidentiality agreement (an agreement protecting the information that is shared between the vendor and the purchaser during the course of negotiations); and/or
- An exclusivity agreement (an agreement whereby the vendor agrees not to negotiate with any party other than the purchaser for a certain period of time).
Your lawyer can provide guidance as to what preliminary documents may be appropriate based on the circumstances and relationship between the parties.
Conditions Precedent
It is crucial that any conditions which would be “deal-breakers” for you are clearly identified. For instance, if an interested party’s consent to the transaction is required (such as a landlord or franchisor), you will want to be able to cancel the deal if the consent cannot be obtained. Another common condition is that of financing. If you are obtaining third-party financing, your lender will need to provide confirmation that they can fund the transaction or a portion thereof.
Conditions are generally set out in writing and time-dependent – in other words, each condition will have a condition date whereby that condition will need to be satisfied or waived before that date. A transaction or deal will remain conditional until all the conditions are satisfied or waived.
Investigations
Due diligence is the investigation conducted by the purchaser and the purchaser’s lawyer to assess the legal, financial and business risks of a proposed transaction.
The purchaser will conduct their due diligence on the business to determine relevant issues with respect to operating that business. For example, a prospective purchaser may enlist the services of accountants or consultants to assist in reviewing financial statements, tax returns, cash flow and income statements. The prospective purchaser will also be responsible for inspecting the business premises and the condition of any assets.
Your lawyer will conduct certain legal due diligence on the corporation and/or vendor to ensure that you are aware of existing liabilities to ensure that you, as a prospective purchaser, do not unwittingly assume when you buy a business. For example, in a share purchase where you are buying shares of a corporation, you will be assuming all liabilities of the corporation which are not extinguished prior to completing the transaction. In addition, a prospective purchaser may inherit liability for outstanding sales tax, employment remittances, payments to Workers’ Compensation, and liability to certain government departments.
Conclusion
Although it may seem like a matter of finding a business to purchase and determining the price for that business, a prospective purchaser will discover that there are a number of other items and terms which must be considered before agreeing to and following through with the purchase of a business. A good lawyer will be able to minimize your exposure to unwanted liability while still facilitating the transaction efficiently and effectively.
If you are interested in purchasing or selling a business, please contact:
Elizabeth Czyrnyj
Lawyer
204.956.3548
[email protected]
