What does buying or selling a business entail? Every industry and every transaction is unique, so you will need personalized guidance and advice from a Toronto business lawyer. Nevertheless, there are particular fundamentals that apply to every purchase and sale of a business.
The most important transactions must be arranged on clear, favorable terms and offer complete legal protection to everyone who is involved. A failure to have the advice of a business lawyer when buying or selling a business frequently leads to legal disputes that are easily avoidable.
What should you know if you buy a business in Ontario? What should you know if you sell your business? Why will you need guidance from an Ontario business lawyer? Read this brief discussion about purchasing and selling businesses, and you will find the answers you may need.
How Are Businesses Bought and Sold?
When one business purchases another, the purchase is called an acquisition. Acquisitions happen in two ways – through purchases of assets or through purchases of stock:
- Asset purchases: The buyer purchases the assets of the company: stock, inventory, equipment, and facilities. Because the buyer decides which particular assets to buy, in many cases, asset purchases may be a better option than stock purchases.
- Stock purchases: The buyer purchases shares of the company from the shareholders and acquires the company’s liabilities as well as its assets. This may be an easy or difficult way to buy a business, depending on the number of shareholders.
Before You Sell Your Business
Before you sell your business in Ontario, take the following steps and consult your business lawyer to make sure that you have satisfied your obligations and that you’ve adequately protected your interests:
- If you lease space, determine how your lease may be transferred to the purchaser.
- Find out if your licenses can be transferred or if the buyer must acquire new licenses.
- Ask your lawyer to review your contracts with service providers, vendors, and clients to determine what your obligations are to those parties.
- Perform a lien search. Satisfy outstanding liens or arrange for payment. Any outstanding liens against your business must be disclosed.
- Prepare the necessary financial statements, disclosures, and other documents ahead of time.
What Steps Are Involved When You Buy or Sell a Business?
When a business is bought or sold, both parties must sign an Agreement of Purchase and Sale (or “APS”). Closing documents are then prepared so that the transaction will take effect on the closing date indicated in the APS.
An Agreement of Purchase and Sale is a binding contract between a buyer and a seller that obligates the buyer to buy – and the seller to sell – assets or shares of a business subject to the terms and conditions set forth in the APS.
The first step in the transaction is negotiating and drafting the APS. Although an APS may be drafted by a real estate agent, if you are the buyer or seller, you should have an Ontario business attorney either draft the document or review it before you and the other party sign it.
The buyer and seller must also select a closing date, the date that the ownership will be legally transferred. That date may vary, but it is typically set thirty to sixty days after the buyer and seller sign the Agreement of Purchase and Sale.
Satisfying the APS Requirements
As the closing date approaches, the lawyers for both sides will help their clients satisfy the conditions of the Agreement of Purchase and Sale. The conditions that must be satisfied usually include:
- Financing: Completing the transaction usually requires the buyer to secure financing with acceptable conditions and terms. Buyers may have preliminary discussions with lenders before the APS is signed.
- Due Diligence: A buyer will have sufficient time to review the financial statements and financial position of the business and to learn and weigh the obligations and risks the business entails. It’s a chance to identify difficulties with a purchase before the closing.
- Property Owner Consent: If the premises of the business are leased, the property owner’s consent to the transaction is required. The lease may include other requirements which the buyer will need to learn and understand.
What Should You Know About Indemnity?
Even when everything else in a transaction goes smoothly, the seller’s liability may be a difficult negotiating point. An indemnity protects a buyer against damages sustained due to a breach of a seller’s warranties, representations, and covenants.
Typically, buyers want sellers to be fully accountable for these damages, while sellers want to limit their liability. Limiting liability may require the inclusion in the APS of language qualifiers, a survival period, and monetary limitations.
Survival periods place time limits on a buyer’s protection against a breach of a seller’s warranties, representations, and covenants. Including language qualifiers in the APS – such as “to the best of my knowledge” or “as far as we know” – gives sellers additional legal protection.
An APS can also limit a seller’s liability by setting a maximum dollar amount that a seller will have to pay if the seller is deemed liable for a breach of the warranties, representations, and covenants.
Preparing the Closing Documents
When the conditions set forth in the APS are satisfied, the lawyers for each side will negotiate and prepare the closing documents. While an APS is simply a promise to sell and buy a business, at the closing, the transaction is legally completed and the closing documents are exchanged.
Preparing and finalizing closing documents can be exceedingly complicated. As each transaction is different, different documents will be required. Before your closing, have a Toronto business lawyer review the closing documents and ensure that all of your legal paperwork is in order.
What Else Should Buyers and Sellers Know?
If you have read this far, you understand that closing documents and Agreements of Purchase and Sale are usually quite complicated. In fact, what you’ve been reading is only a brief and general introduction to the complications involved with buying or selling a business.
Whether you are the buyer or the seller, you must be advised by an Ontario business lawyer who routinely handles all types of business transactions, has extensive corporate and tax law experience, and knows how to resolve the most complicated problems that arise in business transactions.