Buying a business – some legal aspects

Here is a list of some issues you’ll want to consider if you are looking at buying a business:

  1. What are you buying?

Right at the start, you should ask the seller for a number of documents:

  • Customer and supplier lists
  • Financial statements
  • Equipment and machinery lists
  • Any major contracts, including the lease and any supply contracts;
  • List of employees, including job descriptions, salaries and years of service
  • Details regarding any liabilities

Before releasing this information, the seller may ask you to sign a non-disclosure agreement. The agreement should not commit you to anything other than confidentiality and the protection, use and return of information.

  1. The initial offer

It is common at an early stage for a buyer to present a letter of intent to the seller. A letter of intent sets out the basic terms of the deal, and can be either binding or non-binding. A seller may ask for a deposit upon signing.

At this point, it is advisable to ask your lawyer to search whether there are any liens on the assets of the business, any unpaid taxes, and any judgments or ongoing lawsuits.

  1. The structure of the deal

After signing the letter of intent, you will need to decide:

Who’s buying? Are you buying the business in your own name or through your company? You will want to discuss this with your accountant. Buying a business through a company has tax benefits and helps shield personal assets from creditors, but if you expect losses for a while, it may be to your advantage to run the business in your own name to write off the losses against your personal taxes.

What are you buying? The seller will likely want to sell you shares because of the lifetime capital gains tax exemption. So you might be able to negotiate a discount if you buy shares. On the other hand, if you buy assets, there is less risk of assuming liabilities. You can also pick and choose the employees and assets you want, and assign as much of the value as reasonably possible to faster depreciating assets.

  1. Paying the price

Some deals involve paying a set amount on closing. When inventory and accounts receivable are involved, these will need to be adjusted for on or after closing.

As a buyer, you may want to try to build a “holdback” into the deal (ie. pay a certain amount later) to ensure that information given by the seller is correct or that profit expectations are met. A holdback can be especially helpful if you are buying shares, in case Canada Revenue Agency conducts an audit and reassesses the company within a couple of years of the purchase.

You could also try to negotiate vendor financing and pay the vendor a percentage of the price in instalments.

  1. Employees, lease, non-compete

If the business has employees, do you want all the employees or just some? And is the seller willing to terminate the employees at closing and pay out their severance? If not, then if you take the employees on, their employment will be deemed continuous for the purposes of calculating their entitlements, including any severance you would have to pay if you later decide to let them go.

You will also want to carefully review the lease. Some landlords try to build a lot of extras into the operating costs, such as rent on vacant space and high management fees. Other landlords try to impose the cost of capital improvements (roof and structural repairs) on tenants. You will probably want to ensure that there is no demolition clause in the lease and that you have adequate assurances about parking. Ideally, you will want to avoid a personal guarantee. A lawyer can help negotiate these and other improvements to a lease.

To prevent the seller from starting a competing business, you should also insist on a non-compete agreement.

  1. The Agreement

Once the basic terms have been agreed to, the buyer’s lawyer drafts the purchase and sale agreement, which describes the assets, provides a mechanism to value the inventory and accounts receivable, and makes the seller liable for the information given to you about the business. If the seller is a corporation, you should ask for a personal guarantee.