The Two-Step Process to Buying a Business or Selling a Business
Purchasing and Selling a Business is a complex transaction requiring legal counsel to draft an agreement, satisfy the conditions to the agreement, and draft closing documents as the case may be. Closing documents can be complex and often require consents or filings with the provincial or federal government. Each business also requires various consents, permits or licenses that are required for its specific operation or specified contracts.
Let’s look more closely at the steps that must be taken in order to legally buy or sell a business:
The Two-Step Process When Buying or Selling a Business
The purchase or sale of a business can be broken down into Two Steps.
- First, an Agreement of Purchase and Sale must be signed.
- Second, the closing documents must be prepared to give effect to the transaction on the Closing Date. Otherwise, the assets, shares or the business cannot be legally transferred.
Step One – The Agreement of Purchase and Sale
In Step One, an Agreement of Purchase and Sale is negotiated, drafted and signed. Agreements of Purchase and Sale are known as either an “Asset Purchase Agreement,” in the case of a pure asset purchase, or, in the case of a share sale, a “Share Purchase Agreement.” For more information on the difference between selling the assets or the shares of a business, read our article here.
In either case, a firm agreement must be negotiated and drafted. Sometimes real estate agents, brokers or even the parties themselves prepare and sign the agreement. However, in most cases, lawyers are retained to help with the processes relevant to signing an agreement, drafting a Letter of Intent (LOI), or, simply, to the discussions that take place between the parties. The lawyer, then undertakes the back-and-forth negotiation with the other side and drafts and re-drafts the agreement.
Any agreement, whether it be an Asset Purchase Agreement, Share Purchase Agreement, or Agreement of Purchase and Sale, will have a closing date. A Closing Date is the date in which both the parties agreed that the transaction will officially occur. Usually, the closing date occurs 30 to 60 days after an Agreement is signed. In this sense, a commercial transaction for the purchase or sale of a business is quite similar to a real estate purchase or sale.
In Step One, then, an Agreement is reached and signed. Now, we must work towards closing.
Step Two – Conditions and Closing Documents
In Step Two, a lawyer must work towards closing by first (a) satisfying all of the conditions to the agreement and second (b) preparing the closing documents.
In most Agreements, the completion of the transaction is conditional upon certain items. For instance, in many cases it is conditional upon the lease being assigned to the purchaser, or it can be conditional on the purchaser obtaining financing or, it can be conditional on the assignment of other trade contracts that are fundamental to the business. Most of the time, it is conditional on the purchaser reviewing the financial statements of the target business to ensure that it is a viable business and that the purchase price is accurate. At a basic level, the purchaser wants to be sure about the profitability of the business he or she is purchasing. This is all conducted during the conditional period set out in the Agreement.
The Agreement, or in other words, the ‘deal’ is not firm until the conditions are satisfied. The conditional period is typically anywhere from 5 to 20 days after the signing of the Agreement.
During this time, the lawyer is working on satisfying the conditions. The lawyer contacts the landlord and obtains the assignment of the lease. The lawyer contacts the accountant and obtains the financial statements for review. The lawyer may even assist in obtaining financing for the purchase.
The lawyer drafts the assignment and assumption agreements for the transfer of the trade contracts, customer contracts or distributor agreements which would be required to be assigned over to the purchaser on the Closing Date. The lawyer may be required to review the zoning by-laws to ensure the zoning is consistent with the nature of the business. Other times, the lawyer must request and review status certificates or permit certificates to ensure no violations in the nature of the business have occurred.
(B) Closing Documents
After the conditions have been satisfied by the lawyer, the deal is then firm. This means the parties are working towards closing by preparing all of the closing documents required in order to legally effect the transfer of the business.
A Purchase Agreement is merely an agreement to sell a business at a certain date in the future. On the Closing Date, documents must be drafted in order to effect the sale. To give a salient example, a Bill of Sale is required in order to legally transfer the assets of a business from the Vendor to the Purchaser on the date of closing. An Agreement alone does not transfer the assets – it merely states that the assets are to be transferred by way of a Bill of Sale on Closing.
In a Share Sale, a common list of closing documents required to be prepared are as follows:
- Authorizing Resolution of Corporation to enter into Agreement
- Consent to transfer of Shares
- A Resolution of the Board of Directors of the Corporation authorizing the transfer of shares
- Endorsing of Share Certificates
- New Share Certificate in favour of Purchaser
- Completion of ledgers and registers in the minute book of the Corporation showing the Shares to be fully entered in the name of the Purchaser
- Resignation of Vendor as director and officer
- Resolution re election of Purchaser s director and officer
- Indemnity Agreement
- Solicitor’s Opinion
- Indemnity re employees
- Acknowledgement and Release by employees
- 116 statutory declaration by the Vendors as to their age and Canadian residency
- Statutory declaration by Purchaser as to residency
- A Certificate of Warranties
- Ownerships of all vehicles
- Mechanical fitness certificates of all vehicles
- Undertaking by Vendors’ solicitors to supply funds held to pay off debts and obligations
- Non-Competition Agreement
- Direction re Funds
- Statement of Adjustments
- Undertaking to readjust
- A Receipt for payment of the purchase price
- Resignation of Vendors as directors and officers
- PPSA registration
- PPSA registration re Promissory Note Discharges of all Personal Property Security Act registrations against the Corporation (or a letter from the Secured Parties in all such PPSA registrations confirming that such registrations will be discharged).
- Certificate of Status of Corporation
- Certificate of Status of Incumbency
- Form 1 Notice of Change
In an Asset Sale, a common list of closing documents required to be prepared are:
- Purchaser’s certified copy of Resolution of Directors
- Purchaser’s Certificate with respect to representations and warranties
- Purchaser’s Statutory Declaration re residency
- Purchaser’s Certificate of Incumbency
- Purchaser’s Certificate of Status
- Vendor’s certified copy of Resolution of Directors
- Vendor’s Certificate with respect to representations and warranties
- Vendor’s Statutory Declaration re residency
- Vendor’s Certificate of Incumbency
- Vendor’s Certificate of Status
- Undertaking to Readjust
- Joint Election under s.167(1) of the Excise Tax Act
- WSIB Purchase Certificate
- Vendor’s Clearance Certificate pursuant to s.6(3) of the Retail Sales Tax Act
- Section 116 of the Income Tax Act statutory declaration by the Vendors as to their age and Canadian residency
- Promissory Note
- General Security Agreement
- Assignment of Lease Agreement
- Assignment of general contracts
- Notice of Termination of Employees
- Offer to Hire Employees
- Assignment of Trade-Name
- Assignment of Telephone Number
- Assignment of Website, Social Media Accounts and other Intellectual Property
- Non-Competition Agreement
- Bill of Sale
- Statement of Adjustments
Other important closing documents are the Non-Competition Agreement, the Indemnity, the Termination or Hiring of the Employees of the business, the corporation resolutions and the statutory declarations and filings with the CRA.
Thinking of Buying or Selling Business?
If you are considering buying or selling a business, speak to a lawyer at Kalfa Law. We offer no-charge 25-minute consultations. We will discuss the specific agreements, conditions, consents and permits that are required for your specific business purchase or sale.
-Shira Kalfa, BA, JD, Partner and Founder
© Kalfa Law, 2020
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.