Buying a Business
Lawyers play key role when purchasing a business
There are a great many different professional advisors who can assist you with the various aspects of buying a particular business, but two such people inevitably should be involved and they are your lawyer and your accountant.
Others may help you with a marketing or business plan or save you from serious mistakes – especially if you are just starting out in your own business, buying into a field which differs significantly from the one in which you are already involved, and/or structuring an additional or innovative financing arrangement. But you may also not need that kind of assistance.
Lawyers and accountants invariably need to be involved at one stage or another and those to whom I spoke were unanimous in suggesting that their involvement commence as early in the acquisition process as possible.
While I think you should alert both your lawyer and your accountant (if you don’t have one or both to whom to turn as you may require them, perhaps your first step in the process is to make sure you have one of each on whom you are comfortable to call), there is no need for them to be integrally involved until you have found a business that you are seriously interested in acquiring.
Since lawyers and accountants contribute to the acquisition process in significant, but rather different, ways each group will be the subject of a separate article. In this one we will concentrate on what kinds of things your lawyer needs to do and how he or she can assist you to acquire the business in which you are interested on a basis that starts you out on a successful footing.
In essence your lawyer is charged with creating the documentation which lies behind your purchase as well as ensuring that you know what and get what you are paying for. The documentation involved usually includes the letter of intent, a formal offer, the asset purchase or share purchase agreement, and any special clauses, covenants, or warranties that you and he may deem appropriate in any of these documents.
A natural outgrowth of creating these documents would be to explain their contents to you, structure them in ways that you and he or she may feel appropriate, and assist you to show the prospective vendor why the various parts are important to you in the process of the sale.
A letter of intent is really a declaration that you intend to buy the business in question at a stated price, is usually delivered with a deposit, can preclude the vendor from negotiating with someone else simultaneously, and is often signed by both parties.
In addition, however, there are many conditions which, if not met to your satisfaction, could cause the sale to fall through and see the deposit returned; it carries with it a request for easy access to the premises, financial statements, employment contracts (especially those of key people whom you may count on staying with you), leases or other long-term contractual commitments; and, permission access information which legal searches may uncover.
At this stage-just as if you were buying someone’s house – your lawyer will do some searches. However, in the case of buying a business, the search process is far more extensive than a title search on a home. There need to be searches that focus upon the Employment Standards Act and any violations of that act to which the business may be called to account, as well as any exposure to the proceedings of the Human Rights Commission – these may come back to haunt you two or three years in the future when the previous owner(s) have long since been paid out and recourse against them would be rather tenuous.
Other searches are intended to discover any liens against the major assets that you are intent upon acquiring, as well as any debentures, mortgages, or other encumbrances which may exist and – perhaps more important – the terms on which these liens or encumbrances came into being (their terms may be favourable enough for you to want to keep them in place).
The next step is to place a formal offer “on the table”. Now, you are setting out what exactly you want to buy, how much you are willing to pay for it, how you are willing to pay for it, what warranties and conditions that you want the vendor to honour, and any other clauses/conditions that you and your professional advisors may feel advantageous enough to you to require inclusion.
As a vendor, I would not want to see anything in the subsequent purchase agreement to which I had not agreed in the offer (that is, unless I were approached about it subsequently and had agreed to it).
However, that raises the point that there’s more than one way to buy a business – you can buy the assets or you can buy the equity, but it isn’t nearly as cut and dried as that. The assets or the equity merely represent poles on a spectrum that can include as many varieties of the blending of these approaches, as there are businesses to be bought or sold!
But, let’s step back a minute and look more closely at what we have just been talking about. Assets are the resources that an organization has at its disposal in order to get on with its business (these could be money, inventories of goods on or for sale, land, buildings, computers, and soon), liabilities are the debts or amounts owed by that organization (such as bank loans, mortgages, debentures, and the like), and equity is the ownership stake in the business (principally, the capital supplied by the owners mid any historical profits that have been retained in or “ploughed back into ” that business).
– Now, then, accountants tell us that the total value of the assets must correspond to the total value of the liabilities and the equity – in effect, the assets are financed by either debt or equity So, you can see that if you were just to purchase the assets of a company, you would have to pay a higher price than if you bought the equity of that company, because the vendor would then be left to discharge any outstanding debts or obligations of that business.
Further, while you may favour buying the assets of the business, two of them may be the land and building from which the business operates principally, these may be mortgaged in a way that you find advantageous (let’s say, 50 year closed mortgage at 3 per cent), and as a result you may decide to seek assignment of that mortgage as a part of the purchase transaction.
While such a move may not reduce the price you pay for the assets, it certainly would reduce the amount of the cash outlay that you would have to make as a part of the deal.
Once you have placed the offer on the table, it has been negotiated further as necessary, and then accepted by the vendor, the actual purchase agreement must be drawn up by your lawyer, vetted by the vendor’s lawyer(s), and then executed by all parties directly involved. While this may seem anti climactic, there is a lot of negotiation that can occur around the purchase agreement and specific points that need to be included in it. It is very much a job for experts.
Last, but not least, once the purchase/sale “closes” – the actual closing is usually handled by the lawyers themselves because by now you’re up to your neck in those proverbial alligators trying to run the business you’ve just bought – your lawyer needs to complete all the registrations and tidy up any details that can take place weeks or months after the deal is done.
Buying a business is very much like buying a house – except a good deal more complicated! So, you will need professional advisors to help you at critical stages along the way. Two such advisors are your lawyer(s) and your accountant(s) and they need to be integrally involved in the process of any such transaction. In this article we have explored the role that your lawyer can play. -Tony Fattal