The Ins and Outs of Buying or Selling a Business
Buying or selling a business may seem like a complex process, with so many different issues to consider, it can be difficult to know where to start. While each transaction is unique, there is a general process that most deals follow, and understanding this process will help to break it down into more manageable pieces.
Step 1: Making ‘The Deal’
The first step to buying or selling a business is agreeing to make the purchase/sale at a high level.
This is the most important step and, if not done well, could lead to months of work only for the deal to fall apart at the finish line. It is imperative that the major deal points are considered and agreed upon with the other party. While there are always last minute items that crop up and need to be addressed, if the major points aren’t agreed to, the rest of the process will be far more lengthy and costly than should have been.
Many people think that once they agree to a price the deal is done. However, there are many other terms that need to be agreed to before you can start to move forward with the process.
Questions to consider include:
- Will it be a share sale or an asset sale?
- Will the seller stay on for a while to help with the transition?
- What are the potential liabilities associated with the business?
- Are there any key customers, suppliers, or employees, and what are their plans for after the sale?
Once the key terms are agreed to, it is good practice to prepare a ‘Letter of Intent’ for both parties to sign. These are usually non-binding and consist of only a few pages, but having all the key points written down on the same document and signed by both parties can save huge headaches down the road.
Step 2: The Agreement of Purchase and Sale
This Agreement sets out every single detail of the transaction and is usually quite complex. It can span from 10 pages to 100 pages, depending on the complexity and size of the transaction. Whether it is a share sale or an asset sale, this Agreement will guide the transaction.
The Agreement should cover all terms of the deal, including:
- The purchase price, terms of payment, and potential price adjustments;
- Representations about all aspects of the business, both good and bad;
- A plan for how the transition of the business will be handled;
- How the liabilities will be addressed;
- Potential taxes and how they will be paid; and
- The Closing Date and responsibilities and deliverables on Closing.
Once the Agreement is signed and all conditions therein are met, the parties have a ‘firm’ deal and they can work towards the ‘Closing’.
Step 3: Closing
Depending on the complexity of the transaction, the Closing will usually take place a few weeks to a few months after the Agreement of Purchase and Sale is finalized.
Prior to Closing a number of items will need to be addressed.
- If the Purchaser will be taking over a leased premises, the landlord will likely need to vet the new owner and provide their consent.
- If the Purchaser is using bank financing to fund the transaction, the bank will want to review the Purchase Agreement and will have a number of items they require to fund the deal.
On the Closing date there will still be a number of documents that will need to be prepared and signed by both parties. Some of these are standard form documents (e.g. HST Tax Elections), and some are a little more complex (e.g. Non-Competition Agreements), but they all have a purpose.
- The Vendor will need to resign their position with the business and provide a full and final release.
- Corporate resolutions and certificates will need to be executed to ensure that the business is in good standing and properly constituted.
- Any permits or third party consents will need to have been obtained.
- Finally, the purchase price will need to be satisfied, either by way of certified cheque or the execution of loan documents — or, most often, a combination of the two.
Step 4: Post-Closing
After Closing, the corporate minute book will need to be updated and authorization for various corporate accounts will need to be changed. The bank will need to update their information, and the new owner may want to open up additional accounts.
Once the new owner starts to run the business, there are often minor issues that are discovered and need to be addressed. Any transition plan that was agreed to will need to be followed and any post Closing payments will need to be made on schedule. Closing date tax returns will need to be filed and paid, and a number of other administrative tasks will need to be completed.
The steps listed above are a general overview of the process, but each deal is unique and has its own specific challenges. For someone buying or selling their first business, the major risk is often not being aware of potential problems and therefore not adequately accounting for them. A strong team of advisors, including accountants, bankers, business advisors, and lawyers can provide valuable advice and help avoid catastrophic issues down the road.
If you have questions about selling or purchasing a business, contact the team at Brown Beattie O’Donovan. We can help you navigate the process.