Buying or selling a business is a very complicated process, especially if you are doing so for the first time. Once you find a business for sale, there are many aspects you need to consider in order to successfully buy a business. In Ontario, there were 446,020 businesses registered in 2015 with 99,059 of them being registered in Toronto alone.
What does it take for you to sell or buy a business in Toronto? What should you legally be aware of? Where do you start? To get you on the right track, here are some essentials you should know.
Business for Sale – Buying An Existing Business
If you do not want to start a business from scratch, it may be less risky and time consuming to buy a business that already exists. But before you do so, there are certain things you need to think about.
1. The Business Structure
The structure of the business you’re interested in purchasing may affect the manner in which you run it. It requires careful consideration and will often determine whether you are buying the assets of a business or the shares/partnership/equity of an existing business. The existing business structure may have an impact on whether you restructure the business post-acquisition.
Here are the most common business structures and what their implications are:
- Sole Proprietorship: This business structure offers you complete control as the owner, but you are personally liable for all financial obligations of the business.
- Partnership: A business structure that involves two or more people, where you all agree to share in the profits or losses. Two types of partnerships–General and Limited. Both have advantages and disadvantages that can affect financial and liability issues.
- Professional Corporations: Certain professions may allow you to run your business as a professional corporation – this often applies to doctors, dentists, lawyers, and accountants, where there is specific legislation that enables these structures. These are often used for tax planning purposes, so the advice of an accountant should be considered, in addition to legal advice when dealing with one of these structures
- Corporation: A corporation is considered a legal entity, separate from its founders. The main benefit is that personal liability is eliminated from the equation. A corporation can be taxed, held liable for its actions, and make a profit.
Studying the existing business structure and determining whether to acquire the assets or the shares of a business is an important first planning step. A lawyer can help you find these answers and may be able to advise you with respect to potential liabilities, regulatory requirements and financing strategies.
2. Legal Due Diligence for Buyers
As a buyer, you will need to conduct a thorough investigation of the business and the seller. You can always reduce or better understand the risks in buying a business by consulting a lawyer before you close the deal. You should not sign any contract or agreement without a lawyer.
With the help of a lawyer, you can explore all the contracts that one business possesses to avoid any issues and liabilities, such as leasing agreements, employment contracts and licensing agreements. Here is a brief look at a few things that should be on your due diligence checklist:
- Contractual Arrangements
- Insurance protection
- Assets and Property
- Corporate Records
- Planning and Advertisements
- Financial Information
- Employee Relations and Benefits
In addition to the above, a lawyer can help put any pending issues on your radar. You should check if all outstanding bills are paid and if there are any pending lawsuits over wrongful dismissal.
Another thing to keep in mind is a bailout clause. This is an agreement that can give you as a buyer a backdoor if something goes wrong.
As a buyer, you should also check if there are any tax issues before signing the contract, as well. Ensure that there are no taxes owed that you will be legally responsible for paying. Depending on your agreement, the way you file taxes as a business may change. Among other things, you may need a new Business Number (BN) or a change in program accounts with the CRA.
During the due diligence process, one major aspect to closely consider as a buyer is, of course, the financial funding to buy the business. What you pay will depend on a close analysis of the business, what you can afford and what you can negotiate.
A thorough investigation can reveal any debts, sales volume and potential ROI the business may have. Assets, intellectual property, customer lists, reputation, personnel, and annual reports are just a few factors that contribute to the market value of the business.
Because of this, you will want to consider a detailed financial business plan or have a formal business valuation conducted separate from any valuation provided by the seller. For instance, you may want to implement a grace period once you take over to ensure that everything is as it should be. Or, you may need to put up personal assets as collateral for loans. There are different government business financing programs that exist in Canada that can cater to your financial needs.
4.The Buy-Sell Contract
Once your research is done and you are happy with the business you are going to purchase, the next step to focus on is the contract. In general, as a buyer, you’re responsible for preparing all the necessary legal documents and sending them to the seller’s lawyer for review. When preparing the legal documents, there are a some essential factors you should keep in mind.
A letter of Intent is often used in business transactions and protects both parties, a business and a seller, clarifying which points of a deal need to be negotiated. A non-disclosure agreement is sometimes included in a letter of intent.
The main legal document you and the buyer will be concerned with is called the purchase agreement. Naturally, because laws and regulations are different from province to province, you should ensure that the agreement is tailored to laws within Ontario should any dispute arise.
There are “schedules” which are attached to the agreement, and contain important information upon which the purchase is based. For example, this section would include things like the seller’s representations and warranties (this ensures that you are getting what you are paying for).
You should also make sure that a non-competition covenant is signed. This ensures that the seller will not be able to open another business that will jeopardize the existing business.
In order to close the deal, a buyer and a seller have to draft and sign the contract and formal legal agreement.
Selling An Existing Business
If you are looking to sell your business, the procedure may be just as complex as buying a business. It is a time-consuming and long drawn out process in an effort to complete the sale. When selling your business, there are essential aspects to keep in mind when selling your business.
First, you need to closely consider many aspects in order to make a smooth sale, transition and exit. This is usually accomplished by creating a succession plan. This is constructed and put in place way before the sale of your business even happens.
A succession plan is basically a roadmap that outlines each step you need to consider on the way to exiting your business at the time of sale. It is aimed at ensuring that the sale covers all aspects, such as protecting your business after the transition, financially securing stakeholders, and preparing the appropriate contingency plans should something happen. Not only does it keep your sale on track with your goals and vision, but it will also help you get a clear idea of what your options are throughout the entire process.
2.Structure of the Sale
As a seller, one thing you need to decide on is how to structure the sale of the business. There are a few ways in which existing owners can sell their business depending on the type of business they have. Before any sale happens, businesses usually undergo a business valuation process where both physical and intangible assets are financially assessed to determine the business’ value.
An essential thing to keep in mind is how the buyer will be financing the purchase of your business. In the case of a management buyout, options for financing can include using personal funds, buying the company’s assets or using its cash flows to pay for a majority of the financing cost. Or if you own a corporation, it can either be sold or transferred to another owner through the sale of shares or assets. As a seller, you need to take tax and legal implications into account. The process of which option you choose to sell your business can be complex and will need the expertise of a lawyer and an accountant.
3.Confidentiality, Non Disclosure Agreement
If you are a seller, you should consider protecting your business from potential buyers. In the course of searching for a buyer for your business, you will come across a lot of potential buyers who will end up not purchasing the business. When this happens you need to protect your business data. This is important to highlight because this kind of agreement protects your business information and ensures that your confidential data doesn’t leak anywhere.
Just as business buyers have to be diligent in drafting up a contract, so do you as a business seller have to ensure that you are diligent in negotiating it. A written agreement should be negotiated at the start to set the business and legal terms of the sale. Once your lawyers have gone over it, you and the buyer agree on a closing date in order to close the deal. That closing date will be when the buyer pays the agreed upon purchase price and all closing documents for transferring assess and business are signed and exchanged.