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About Buying or Selling a Business

 There are many steps in buying and selling a business: horizontal rule


The first step is for the seller to decide to sell his business and to find a buyer. The seller gives information to the buyer, who checks the accuracy of the information. This information may include:

  • financial statements
  • a list of customers
  • contracts which the business has agreed to
  • the assets of the business
  • the lease with the landlord
  • any debts of the business
  • any government licences or consents required
  • any liabilities facing the business

You should consult accountants, lawyers and other professionals to help you check the information. Sometimes the buyer and seller decide to sign a preliminary contract called an option. This states the basic points of the business sale. Usually, the option is written so that the deal will end if certain things cannot be done or if the information is not a accurate.

Be very careful and see a lawyer before signing an option, letter or any kind of document. The option might force you to buy or sell the business or to pay damages if you later cannot or do not want to.

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Share Purchase or Asset Purchase

There are two common ways to buy a business: buying the assets of the business or buying the shares of the company that owns the business.

Buying the assets means that you are buying the inventory, equipment, land and good name of the business. There may be benefits to the buyer as you can pick and choose which assets to buy and which not to buy. You may be able to better avoid lawsuits or claims from the running of the business in the past. You did not own the business at that time and the lawsuit should be directed at the previous owner. The disadvantage is that you may have to pay more taxes in an asset sale. Some of the assets may also be under a claim by third parties.

Buying the shares means that you buy the company which owns the business. Technically, there is no change in the ownership of the business itself. The shares of the company are transferred from the seller to the buyer. This minimizes taxes due. However, you lose the ability to pick and choose among assets. Generally, you must buy all of the business. Also, you are liable for any claims or lawsuits which arise from the running of the business by the seller before you owned the business.

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Contract of Purchase and Sale

The contract of purchase and sale is the agreement between the buyer and seller which describes in detail the promises and obligations of each party. The contract should be written by a lawyer. it may describe many things, including:

  • The basic structure of the sale. Who is buying what from whom, when, and for how much.
  • Allocation of the purchase price. How the price is divided among the assets, or among payments for shares.
  • Representations and warranties. The promises and obligations of each party.
  • Termination of employees. Do you keep the existing employees or not?
  • Conditions precedent. "Subject to" clauses. What happen before you complete the sale.
  • Taxes. If the seller is not a canadian resident, the buyer must withhold taxes.
  • Schedules. Additional information attached to the contract regarding the sale.
See the article "Contract of Purchase and Sale" for details on each type of provision.

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Consent of Landlord and Others

The sale of a business may require the consent of third parties. Many business rent space. As part of the sale, the seller may need to transfer his lease to the buyer. This will be governed by the existing lease between the seller and the landlord.

An assignment places the buyer in the place of the seller in the lease. The landlord may accept the buyer in the place of the seller, or terminate the existing lease and enter into a new lease with the buyer.

Some business sales will require the consent of other parties beside the landlord. For example, franchisors or government agencies.

See the answers to an FAQ on consents of third parties for more information.

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As part of the investigation of the business, a series of searches should be conducted. These searches are best conducted by a lawyer, and may include checking many government and court records.

The basic point of these searches is to make sure that the seller owns the assets which are part of the sale and that no one has a claim over the assets. The searches also minimize the possibility that the business is facing big problems such as tax liens or licensing difficulties.

Our answer to an FAQ on searches will give you a specific checklist of items to search.

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Restrictive Covenants

A restrictive covenant is an agreement not to do something. Sometimes the buyer will want the seller to agree not to become involved in a business which competes with the business he/she just bought. This protects the value and reputation, or goodwill, of the business.

Restrictive covenants must be carefully written. They may not be enforceable if the restriction is too wide or restricts trade unduly. The restrictive covenant should go no further than reasonable necessary to protect adequately the business sold. This may involve a restriction on the seller from opening a similar business in the area near the business sold for a period of a few years.

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The closing occurs on the completion date. The completion date is when the sale finalizes and the transfer of ownership occurs. This involves the pay out of money, the delivery of documents, and the registration of documents.

It is always best to have everything prepared and finalized well before the completion date. There may be many documents which must be signed and delivered. including:

  • conveyancing documents
  • a bill of date
  • a consent and assignment of lease
  • transfer forms for licenses
  • assignment of receivables
  • third party consents

The lawyers for the seller and the buyer will conduct the actual transfer and deal with the transfer formalities according to normal practice.

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Investigation | Share Purchase or Asset Purchase | Contract of Purchase and Sale | Consent of Landlord and Others | Searches | Restrictive Covenants | Closing

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This page last updated: September 22, 1999
© copyright 1999 Lawyers-BC.Com Services Ltd.