Brian Wilson Law | Law Simplified | Buying A Business

Buying A Business

Purchasing an Existing Business

Why Do I need a lawyer?

Buying an existing business is unlike buying a house or a car. A business is on the whole an intangible asset. Though there are tangible assets such as equipment, inventory, leased premises, these are merely tools for achieving a future stream of revenue. In business, that future stream of revenue is never assured and there are myriad risks involved. Some risks are beyond your control, others can be managed. We can assist you to reduce or eliminate certain risks to help position you for success.

Asset Purchase or Share Purchase

The purchase of a business takes 1 of 2 forms: asset purchase or share purchase.

Asset Purchase

With an asset purchase, you as buyer purchase the assets of the business (equipment, leasehold improvements, inventory, goodwill, customer lists, etc.) but not the debts of the business, which the seller is supposed to pay out at the time of sale. With our assistance, you can purchase the assets of the business and operate without worrying about being responsible for any pre-existing debts or even unknown debts. This is the biggest advantage of the asset purchase. From a tax perspective, an asset purchase is often more favourable to you as the buyer but this is a matter to be discussed with your accountant.

Share Purchase

Where the business is incorporated, the purchase of a business can also be done by way of a share sale. You as buyer purchase the shares of the company, thus becoming the owner of the business (through the company). The assets of the business remain with the company and in most cases, so do the debts. Your biggest risk with the share purchase is that some debts may be unknown at the time of purchase and unplanned for. We can help you mitigate those risks by drafting proper provisions in a share purchase agreement. The biggest advantage of a share purchase is that in most cases, there is no change of ownership in the assets, equipment and debts and fewer changes needs to be made as far as changing over supplier accounts, utilities, etc. However, other items do require changes (consent of the landlord, consent of the franchisor (for franchise purchases) signing authority on bank accounts, some licences (eg. liquor licence). From a tax perspective, a share shale is often more favourable to the seller but this is a matter to be discussed with your accountant.

The Process:

  • If a business broker is involved, the broker may handle the drafting of the Purchase Agreement or you can contact us to prepare it.  If there is no business broker, you should definitely contact us to prepare the agreement, which is the single most important legal document for the whole transaction.  We will meet with you personally and discuss the transaction in detail to determine what terms should be included in the Purchase Agreement.  Either way, it’s best to involve us from the beginning, while the purchase is still conditional.
  • After acceptance by the sellers, you as buyer will attend to satisfying your conditions (securing financing, due diligence (reviewing the seller’s documentation such as financial statements, leases, franchise agreement, etc.), obtaining the necessary consents (landlord, franchisor, licencing bodies, etc.).  Your accountant typically reviews the financial statements while we review the legal documentation such as the lease.  We review these documents with you, covering the key points, potential problems/risks and certain suggested changes if possible.  You should allow a few weeks for this process to be completed properly as third parties such as landlords need time to respond.
  • Once the conditions are satisfied, the purchase contract becomes “firm” (goes ahead) and the parties begin to prepare for the closing.
  • We obtain and review certain searches on the sellers depending on the nature of the transaction (eg. liens against the assets of the business, court judgments, bankruptcy, corporate searches, etc.)
  • We co-ordinate with the sellers’ lawyer and prepare other documentation for the transfer
  • We meet with you prior to closing to review and sign the closing documents
  • We couriers cheques and other documents to seller’s lawyer / receive other documents from seller’s lawyer by courier
  • Once both sides are satisfied with each other’s deliveries, the transaction is considered complete
  • We send you a final report with all of the documentation (a few weeks after closing)

Costs

You legal expenses are made up of:

  • A legal fee that we charge for our services;
  • Legal expenses (eg. search costs, registration costs, couriers, etc.) incurred as part of our work; and
  • HST

For business purchases, the total costs depend on the nature of the transaction itself and we typically charge you based on time spent at a set hourly rate.  In some cases, unexpected problems arise which can drive up the costs.  However, we attempt to provide you with a range for your anticipated legal costs.

Feel free to contact us and we will be pleased to review your needs and provide you with the estimated costs.