Do you know what to expect as part of the purchase transaction?
If you are interested in or considering buying or selling a business, please refer to Buying a Business in Manitoba for further information. If you are purchasing a business through either an asset or share purchase, there are certain terms and conditions that should be contemplated in the agreement – please refer to Buying a Business in Manitoba: Entering into the Purchase Agreement for further information.
Once you have made the decision to purchase a business and your lawyer has prepared the agreement, the transaction outlined by the agreement will need to “close”. We have set out below some practical information, and what you can expect, once you have entered into an agreement to purchase a business and the transaction closing process.
Practical concepts and considerations are contained in purchase agreements. Note that the concepts discussed herein can vary depending on whether the purchase transaction is an asset or share transaction.
Working Capital
In an agreement, the concept of “working capital” will likely be included. Working capital is a term that refers to the funds, or the “capital”, required to operate a business on a day-to-day basis, and is typically defined as the difference between a company’s current assets and current liabilities. The agreement will usually set out a certain level of working capital, i.e. the targeted working capital, that is to exist on the closing date of the transaction. Setting out a level of working capital allows the business to maintain sufficient liquidity and stability in its operations prior to and following the purchase transaction.
Often there will be an adjustment to the purchase price based on the actual working capital at the closing date compared to the targeted working capital contemplated in the agreement. For example, if there is more working capital left in the business than initially agreed upon, the purchase price may be adjusted upward. Conversely, if there is less working capital than expected, the price may be adjusted downward.
Employment Considerations
When a purchaser and seller are negotiating the transaction, they should consider and discuss their intent regarding the employees of the business. This should be considered early in the negotiation process, as employees are often integral to the success of the business and can impact the transition of the business from seller to purchaser. More specifically, the purchaser and seller must decide how to handle the transfer of employment contracts, any severance liabilities, and employee benefits.
The way employment contracts, and related obligations and liabilities are handled depends on the type of transaction. In a share purchase, the employment contracts and associated obligations typically remain unchanged, as they are carried on by the corporation in which the shares are transferred. However, in an asset purchase, the purchaser is not obligated to retain the seller’s employees, though they may choose to do so. In the event the purchaser does not wish to retain all or a portion of the employees, the seller may remain liable for employment entitlements. However, under employment standards legislation, if the purchaser continues an employee’s employment without interruption—such as through an asset purchase—the purchaser assumes the role of the employer and becomes liable for employment entitlements.
Transition Assistance and Non-Competition Clauses
It is important for a purchaser to consider what to expect of the seller after closing. A seller may agree to assist the purchaser of a business for some time after closing by staying on as an employee or independent contractor, introducing the purchaser to customers and suppliers, or by familiarizing the purchaser with the business operations. The purchaser will need to consider (a) to what extent this service is to exist (i.e. the length and amount of time the seller is willing to assist with transition), as well as (b) whether this service is covered in the purchase agreement (for example, by considering an agreement on the closing that includes the financial responsibility of a salary or management fee to be paid.)
It is also possible that, after the transaction has closed, the purchaser will want the seller to agree not to compete with the business in specific ways (for example, through opening a similar business, soliciting employees, etc.) for some time. The agreement to not compete can be achieved in various ways, and more specifically, (a) through inclusion of a non-competition clause in the agreement, as well as (b) delivery of a standalone agreement addressing the details of the restriction(s) as a condition of closing the transaction.
Post-Closing Issues
Once the transaction has closed, the purchaser’s focus should shift to various essential post-closing matters to ensure that the transition is smooth. Key post-closing issues often include:
- Corporate Organization
The purchaser will need to take ownership of the business. This could involve registering business names (if applicable), updating company records, and ensuring that all legal documentation reflects the new ownership. - Public Announcements
The purchaser may need to communicate the acquisition to the public, employees, customers, suppliers, and other stakeholders. - Administrative Matters
Several administrative and operational tasks may require attention post-closing. For example, the purchaser should ensure that all necessary insurance policies (such as property, liability, and workers’ compensation) are updated to reflect the new ownership. - Filings and Regulatory Compliance
The purchaser must ensure that all required filings are completed with relevant regulatory bodies. This may include updating business registration information, filings with tax authorities, securities regulators (if applicable), and any other industry-specific regulatory bodies.
Conclusion
After deciding to purchase a business and entering into the purchase agreement, a purchaser will find there are a few more practical steps that need to be taken before a purchaser can own and start running the business. A good business lawyer will be able to help you navigate the business and transaction complexities as well as see to the effective closing of the transaction, putting you in the best position to begin operating the business.
If you are interested in purchasing or selling a business, please contact:
Elizabeth Czyrnyj
Lawyer
204.956.3548
[email protected]
