A potential purchaser now identified, at least preliminary due diligence complete and a general structure and perhaps a price or valuation mechanism now agreed to, it is time to turn all efforts to formally documenting and subsequently closing the negotiated deal.
In this article, the third part of a series of articles that will explore the transfer of a BC business undertaking from the seller’s perspective (see Part 1 – Preparing To Exit here and Part 2 – Negotiating the Deal here), we consider the intended third and final stage – documenting and closing the deal. Specifically, this article will outline five items typically attended to once a purchaser and seller have settled on general structure, perhaps pricing and have otherwise completed at least preliminary due diligence. Careful consideration of these issues, with the assistance and in consultation with proper legal and accounting advisors, should be considered fundamental in order to protect the seller's business through any sale process but also increase the probability of a successful exit process – while reducing any risk of a failed deal, financial loss or expense and, perhaps, litigation.
1. Documenting the Formal Deal. At this stage it is presumed that the parties have prepared and jointly executed a suitable form of non-binding letter of intent or memorandum of understanding as suggested in Part 2 of this series. A formal agreement – either binding the parties to a future closing or giving effect to an immediate purchase and sale – is necessary. Depending on the structure, context and/or complexity of the negotiated deal either form may be suitable but understanding the implications and effect of such a document, again with proper guidance of an experienced commercial lawyer, is fundamental. Further, any formal agreement should be prepared by or in consultation of experienced commercial lawyers to ensure that any final document:
addresses basic elements of contract law to ensure a suitably enforceable agreement;
attends to somewhat standard components of such agreement to identify, mitigate or at least allocate potential risks; and
incorporates potentially unique and sometimes complex provisions to address the particulars set out below.
No one structure fits all potential business purchase and sale proposals. No one agreement covers every business context, regulatory environment, negotiated features or tax structures. While the overall value and complexity of the transaction may dictate the appropriate scope and eventual expense of legal (and yes, accounting) advice obtained, it is seldom the case that the purchase and sale of any business is recommended without legal (and yes, accounting) services to some degree.
2. Approvals & Consents. It is not uncommon in many smaller purchase and sale transactions to hear that no third-party consents are necessary and all parties are agreed and completion is desired at the earliest possible opportunity. Similarly, often parties will defer a known third party negotiation to after completion. What could possibly go wrong? Unfortunately a lot. Perhaps there is a vital contract with a key customer or supplier that requires consent to be assigned (as part of an asset sale) or transferred as part of a change of control (normally part of share sale). In certain circumstances there are regulatory matters to address; licensing to obtain or minority shareholders to bring on board. At the very least, in almost all commercial circumstances, there is a commercial lease to address with a landlord. Typically, at least in British Columbia, any commercial lease cannot be assigned without consent of the landlord, nor can any change of control happen to a tenant without triggering a consent requirement. It is important that any and all material consents and approvals are at least identified and addressed in the final purchase and sale agreement. Experienced legal counsel will be familiar with various alternatives used to address pre-closing, closing and post-closing consents and approvals and – from a seller’s perspective – methods for protecting the seller’s business during such a process.
3. Employees & Other Special Considerations. Whether the buyer or the seller of a business, a purchase and sale agreement is not just a contract that involves commercial law or, with a share sale, perhaps corporate law considerations. Other areas of law (often considered niche or specialized areas but surprisingly often triggered in a majority of transactions transferring a business) may have a potentially material impact on process and outcome. Tax issues if purchasing shares from a non-resident or perhaps GST issues if purchasing assets. Employee obligations, which can generally carry-forward to a new owner, can be the subject of particular processes used to allocate liabilities or mitigate anticipated post-closing obligations. These issues require proper consideration from experienced legal counsel and careful structuring and drafting to avoid costly mistakes.
4. Closing & Payment. Generally there are two scenarios that are documented in purchase and sale transactions – the immediate sale or transfer of ownership and typically payment (in simple terms, for example, like a Bill of Sale) or an anticipated sale or transfer of ownership and payment in the future upon the satisfaction of certain conditions. In either case, the actual consummation of the intended transaction is often referred to as the “closing” and in both circumstances (albeit more so with the latter) it is again important to apply proper consideration of the “who, what, why, when and how” and reflect that consideration inn careful structuring and drafting. Payment is often considered a simple matter but save for the simplest and probably least likely scenario – a cash payment with no tax or holdback considerations – potential issues can undermine the seller’s expectations if not addressed. Wire transfers subject to delays and set-off charges. A regular cheque is, basically, a promise to pay and if not eventually honoured when deposited can create, frankly, an avoidable legal mess. Any deferred payment or vendor financing should again be fully considered, properly structured and carefully drafted.
5. Post Closing. Very few transactions involving the purchase and sale of a going concern business have no post-closing issues to address. Whether accounting matters (inventory, accounts receivable or accounts payable); tax matters (filing elections, payment of applicable taxes or indemnity for pre and post closing tax obligations); corporate matters (obtaining corporate records, updating registry filings, updating shareholder and director/ officer registers); commercial matters (dealing with employees, customers, lenders and landlords) or simply practical matters like locks, records and passwords). Experienced legal counsel can be incredibly helpful both in terms of drafting post-closing transition expectations but also managing process and completing certain tasks.
Endeavor Law can assist those looking to document and close a potential purchase and sale of a business undertaking and, of course, provides legal advice and services related to any business purchase and sale process. Endeavor Law will always seek to provide competitive pricing for any legal services requested and is pleased to discuss fee arrangements that suit any potential client.
Does not constitute legal or other advice and must not be used as a substitute for legal advice from a qualified legal professional in your jurisdiction who has been fully informed of your specific circumstances. Information may not be up-dated subsequent to its initial publication and may therefore be out of date at the time it is read or viewed. Always consult a qualified legal professional in your jurisdiction.