Buying a Business

While there are many possible ways to buy a business, the first step for a perspective business buyer is often finding a viable business they wish to purchase. Businesses not found by a perspective buyer through employment, or industry associations are often found through a business broker or commercial realtor (“broker”). Most brokers have listings or access to listings of businesses for sale, or can approach businesses not listed if given sufficient information by a perspective buyer. A competent and experienced broker can often help a perspective buyer evaluate a business. Evaluations are done in many different metrics, but often equate to a multiple of business profit plus assets and minus liabilities.

Those who use the services of a commercial realtor or business broker will often have a letter of intent or contract drafted with the seller prior to meeting with or obtaining legal counsel. At this stage, most deals are still subject to a number of conditions which remain at the discretion of the perspective buyer to satisfy, and therefore the deal is not truly binding.

Another major consideration for a perspective business buyer is the structure of which the purchase will take. Early in the process, a determination will be whether the purchaser wishes to buy shares or assets of the target company. In a share purchase, everything which the company owns, both good and bad is acquired. One major advantage of share purchases ( with some exceptions) is that any contract which the target company was a party to will continue. In other words, the new purchaser will simply stand in the shoes of the existing company, and not be forced to apply for permits or licenses. The flipside is any liabilities which are attributed to the company will now become the responsibility of the purchaser. Thus, when a share purchase is chosen, the purchaser cannot pick and choose elements of a company. In the event of the company owned by multiple shareholders, it is important to ensure all shareholders are willing to sell their shares on the same terms and conditions or on conditions acceptable to the purchaser.

Because of the increased risk assumed by the purchaser in a share purchase agreement, the role of a lawyer is greater. The lawyer will be spending a greater amount of time and resources trying to minimize any risks being assumed by the purchaser, including liens and encumbrances, legislative or employment liabilities, and legal and tax responsibility.

By contrast, an asset purchase allows a purchaser to select assets it desires and leave behind those it does not. However, in the case of property, this will likely increase the transitional costs and taxes payable for a purchaser. Also with an asset purchase, the parties will have to agree on a price allocation among such things as assets, goodwill, equipment and inventory. Each of these categories has a different tax treatment, and therefore there is a vested interest in the purchaser having a higher depreciating category assigned a higher value.

Financing the acquisition of the business is something that is often done before a purchaser contemplates searching for a given company. However, financing generally cannot be finalized until such time as the lender has an opportunity to view the target company. Therefore, almost every asset or share purchase agreement contains a clause making its finality subject to the purchaser obtaining financing. Also common in smaller transactions involving owner-operator is the seller providing some financing to the purchaser, or the sale price being paid contingent upon future revenue of the company.

When a seller is providing financing, security is often taken back in form of a personal guarantee of the buyer and/or the shares of the company being held in escrow in the event the buyer fails to abide by the agreed payment term.

The role of a lawyer throughout this transaction is to assist the purchaser with the issues he or she faces, which are often as unique as the number of businesses existing. The coordination of a team of financial, accounting and other experts is required to meet this challenge. Equally important is to ensure that no key items are missing from the deal, and to restrict the seller from competing with the purchaser as much as possible after the transaction is closed.

Rob Monterio

Rob has been practising law in British Columbia since 2005. With years of experience in estate administration, commercial and corporate law, as well as residential real estate transactions, Rob offers his clients an unparalleled degree of professional expertise and timely advice.