By Dominique Amit
Buying a business can be an exciting opportunity for growth; however, it is also a process with significant legal and financial implications. Whether you’re acquiring a small business or a large company, due diligence and strategic planning are key. Here are some key considerations to keep in mind from a legal standpoint.
1. Structure of the Purchase
One of the first things you need to consider is whether you are buying the assets of a business or the shares of the company. An asset purchase allows you to take on specific assets and liabilities, while a share purchase involves taking over an entire company. Each structure involves different tax, as well as legal, implications, so it’s important to consult with both legal and financial advisors early on in the process.
2. Due Diligence
Conducting thorough due diligence is critical and involves reviewing the business’s financial statements, contracts, leases, tax records, and litigation history. The goal is to identify any potential red flags or liabilities that could affect the value or viability of the business.
3. Contracts and Agreements
It is important to evaluate all existing contracts, including those with suppliers, landlords, and employees, and determine whether these contracts are assignable or require renegotiation. Also consider whether there are non-compete or non-disclosure agreements in place to protect the business’s goodwill and proprietary information.
4. Employment Matters
You need to understand the implications of taking on existing employees. Are there collective agreements with a union, outstanding entitlements or wrongful dismissal potential risks? In a share purchase, employment relationships automatically continue, while in an asset purchase, you may choose which employees to retain - but this still carries certain legal obligations.
5. Regulatory Approval and Licensing
If applicable, ensure the business holds all the necessary permits and licenses and that they can be transferred or re-issued under your ownership. This is an important for both asset and share purchases, as a change to the ownership of the shares of a company is generally considered to be a ‘transfer’ if it constitutes a change in control. Depending on the industry and whether you are dealing with provincial or federal regulations, this may impact on the timing of your purchase.
6. Purchase Agreement
The purchase agreement is the legal backbone of the transaction. It should clearly outline the terms of the sale, including price, representations and warranties, indemnities, conditions for closing and post-closing obligations. In some instances, a letter of intent is prepared which begins the negotiations of the terms of the purchase agreement. A lawyer can help tailor these documents to protect your interests and minimize risks.
Purchasing a business is a major investment. Whether you’re buying a business for the first time or acquiring a company with the aim of merging with your existing business we can help you navigate the complexities, avoid costly mistakes, and set the stage for a successful transition.
This article is for information only and is not intended to be legal advice. If you have any questions or would like further information, you should consult a lawyer.
