Purchasing a business in Alberta can be an exciting and financially rewarding opportunity. Unfortunately, if you are unfamiliar with corporate law, the process of buying a business may seem overwhelming. Engaging with legal counsel may help you develop a comprehensive understanding of both the legal and financial implications involved.
Some of the legal steps that are necessary in the process of buying a business include determining the type of sale, going through the process of due diligence, acquiring the right contracts and licenses, and mitigating the risks involved in the purchase.
Step 1: Negotiate the Business Terms of the Transaction
Prior to drafting a definitive purchase agreement, it is important that both parties are on the same page regarding the business terms of the transaction. While a letter of intent or memorandum of understanding may not make sense for every transaction and every budget, being on the same page about the purchase price, the included and excluded assets, how long the old ownership group of the business will stay on in advisory roles to assist with the transition, etc. are all items that should be discussed before commencing with other steps of the transaction.
Step 2: Identify the Type of Purchase – Share Sale or Asset Sale
Deciding between a share sale and an asset sale is another important legal consideration that should be decided at the beginning of a transaction when purchasing or selling a business in Alberta. Each approach has unique implications for taxation, liability, and ownership. In addition to legal advice, accounting advice should be sought at this stage.
Share Sale
A share sale involves acquiring ownership of the entire corporation. The advantage of a share sale is that you acquire the whole entity, including its assets, liabilities, customer contracts, and employees, which ensures the continuity of operations.
However, along with the purchase, you may inherit undisclosed liabilities such as outstanding debts, pending lawsuits, or tax arrears, which is why it is important to undergo the due diligence process when buying a business.
Asset Sale
An asset sale focuses on purchasing specific components of the business, which may include inventory, equipment, contracts, client lists, or intellectual property. The buyer and seller negotiate which assets and liabilities are transferred.
The advantage of an asset sale is that you can select only the assets you want to purchase, while liabilities typically remain with the seller. However, one risk of asset sales is that contracts and licenses including employment contracts may need to be renegotiated, potentially disrupting business operations.
While asset sales are generally more common than share sales, the ultimate decision depends on the buyer’s goals and the specifics of the business. Consulting a corporate lawyer early in this process is crucial to make an informed decision.
Step 3: Conduct Thorough Due Diligence
The importance of due diligence cannot be overstated, as it allows you to assess the value of the business, verify its legal standing, and uncover any potential issues before signing a purchase agreement.
Key areas of due diligence include:
Financial Records
As part of due diligence, you and your legal counsel and accountant will request and review audited financial statements, tax filings, employee remittances, profit and loss statements, and accounts payable/receivable.
Legal Compliance
It is also important to confirm that the business complies with your local, provincial, and federal regulatory requirements, including licenses, permits, and environmental laws.
Contracts and Agreements
During due diligence, you must evaluate supplier contracts, leases, employment agreements, and customer agreements for transferability and liabilities.
Intellectual Property
Verification of any trademarks, patents, copyrights, and any proprietary information critical to the business is critical if the value of the business being purchased is in any way comprised of its intellectual property. This might include the name, website, social media, and phone numbers. This will ensure you are legally entitled to all intellectual property relevant to the business you wish to purchase
Pending Litigation
Checking for ongoing legal disputes, claims, or liabilities associated with the business will provide you with confidence that the transaction will not come with hidden and costly surprises post-closing.
Step 4: Negotiate and Draft the Purchase Agreement
Once due diligence is complete and you have determined the business meets your expectations, your legal counsel will draft and negotiate a purchase agreement. This legally binding contract outlines the terms and conditions of the sale and acts as the basis for the transaction.
There are many important parts of a purchase agreement. The purchase agreement should include a purchase price, a list of assets and liabilities, assurances from the seller regarding the financial status, legal compliance, and obligations of the business, any conditions that must be fulfilled before the completion of the sale, any non-compete clauses, as well as an outline for dispute resolution between the buyer and seller in the event that an issue arises, despite the best efforts of the purchaser’s legal counsel and accountant.
Step 5: Obtain Necessary Consents, Licenses and Approvals
Purchasing a business often requires transferring or applying for business licenses, permits, and government approvals under local, provincial, and federal jurisdictions. This could include business licenses, health and safety permits, and environmental clearance, if necessary. Additionally, many contracts (such as leases) require that a corporation that is being sold to a new shareholder group obtain consent from the other contract party for the change of control.
Make sure to consult your lawyer about which permits and licenses are necessary for your specific purchase in order to expedite the process while avoiding regulatory difficulties.
Step 6: Finalize the Transaction
Once the terms and conditions of the purchase agreement are met, the sale of the business can be finalized. At this point, the buyer will pay the purchase price and the seller will transfer the agreed-upon assets into the buyer’s ownership.
Ensure your legal counsel is present during this stage to safeguard a smooth transfer of ownership. They will verify compliance with all legal requirements, ensure that all documents are correctly signed and submitted and that all post-closing requirements, such as the settlement of debts and CORS registration, are completed.
It is also imperative to inform the necessary parties about the sale. This includes stakeholders, employees, suppliers, and customers. Any other post-purchase processes should also be done at this time including renewing permits and implementing operational changes if desired.
Planning for Success
Purchasing a business is a complex process that requires careful planning, informed decision-making, and the guidance of knowledgeable professionals. With the right preparation and legal support, you can achieve a smooth transaction and position yourself for success as a business owner. At KH | Dunkley Law Group, our corporate law professionals are here to provide you with detailed legal counsel throughout the process of purchasing or selling your business. If you are ready to start the process of purchasing a business, book a consultation today.
