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Buying or Selling a Business Business Transactions Don't Need To Be Complex Arrangements.

two business lawyers negotiating the purchase and sale of a business at a conference table

Whether strategically furthering growth or pursuing an investment opportunity, a business purchase or business sale is one of the most significant, complex and high-pressured processes for any company. Enthusiastic about developing a thorough understanding of our clients' businesses, our Toronto business purchase and sale lawyers provide all parties to a transaction with informed legal advice to help them achieve their business purchase or business sale goals.

Entrepreneurs and business owners often wait until the last minute to make hard decisions about the sale or purchase of a business. Time and preparation are key to developing a clear plan and ensuring that you get the full value of your business. With years of experience in corporate and business law, find out how our lawyers can help you lay the groundwork for a successful business transaction.

What is a Business Purchase or Business Sale?

A business purchase or business sale is a business transaction that involves the transfer of ownership of a business or certain assets from one party to another party.

In some cases, it can be a simple endeavor. While in other cases it can be a complex and challenging process that requires careful planning, strategy, due diligence and legal support to get the transaction done right.

For this reason, it’s always best to work with an experienced Toronto business lawyer when you’re looking to complete one of these transactions.

What Are The Main Steps In An Asset Purchase or Share Purchase Transaction?

Whether you end up going the route of an Asset Purchase or a Share Purchase, there are a few key steps that should take place in almost every business transaction.

  1. Offer to Purchase / Letter of Intent
  2. Due Diligence or Investigation Period
  3. Contract Review For Any Contracts
  4. Drafting the Definitive Agreement
  5. Negotiations With Opposing Party
  6. Preparing Closing Documents
  7. Negotiating Side Transactions
  8. Facilitating a Smooth Closing

These steps are discussed in more detail below:

1. The Offer to Purchase / Letter of Intent

A letter of intent (LOI, Offer letter, Term Sheet or Memorandum of Understand) is a very brief document outlining the basic understanding between two or more parties which they intend to formalize in a legally binding Purchase Agreement. 

These agreements are often non-binding on the parties, so either party can back out. Additionally, they usually focus on setting out the main terms with the primary purpose of seeing if a basic deal can be reached before the parties waste anymore time and money on the transaction.

The Purpose of a Letter of Intent or Offer to Purchase

While a Letter of Intent is not always needed, it plays a fundamental role in most transactions because it helps the buyer and seller achieve the following goals:

  1. To allow parties to sketch out fundamental terms quickly before expending substantial resources on negotiating definitive agreements, finalizing due diligence, pursuing third-party approvals and other matters.
  2. To declare officially that the parties are currently negotiating, as in a merger or joint venture proposal
  3. To provide safeguards in case a deal collapses during negotiation
  4. To verify certain issues regarding payments made for someone else (e.g. credit card payments)


It is always best practice to see if you can come to an agreement as early as possible before you end up spending tens of thousands of dollars on a transaction. This way, the earlier that you find out that a transaction is not going to work because the buyer and seller cannot agree, the earlier you can both save your time and money and look elsewhere.

How To Draft a Good Letter of Intent or Offer to Purchase

Sometimes we have clients that prepare their own Letters of Intent. In some cases, these work because they allow the buyer and seller to assess whether they are on the same page before proceeding. Additionally, it is a very cost effective way of proceeding with the early stages of a transaction.

While the DIY approach works in some cases, with complex transactions you probably want to speak with an  experienced mergers and acquisitions (M&A) lawyer to help you strategize at this stage.

When we help our clients prepare a Letter of Intent, we focus our time on:

  • Strategically pinpointing the early issues.
  • Ensuring you don’t lock yourself into a bad deal from the start. This makes it harder to renegotiate the deal later down the road.
  • Pinning down the main parts of the deal to protect you and the investment you’re going to make.
  • Negotiating the value so that you don’t overpay for the business or undersell your business.
 
If you’re interested in buying or selling a business in Toronto, it would be a good idea to contact us by clicking here or by giving us a call at (416) 580-0345. We would be more than happy to answer your questions and give you some guidance.

2. Conduct Due Diligence

Due diligence is an investigation, audit, or review performed to confirm facts or details of the business under consideration. 

In the financial world, due diligence requires an examination of financial records, contracts, past actions or inactions, liability risks and more before entering into a proposed transaction with another party. 

The goal here is to avoid unforeseen matters when buying a business.

  1. Financial statements and tax returns – used to assess whether taxes have been paid, what liabilities (loans/debts) the company owes, what assets are being purchased, and to determine the value of the business in general.
  2. Corporate profile report – A report setting out the key information about a corporation, like Directors, Officers, address and recent filings. It is used to confirm the key details about a company and its directors.
  3. Vendor’s Corporate Minute Book – the Corporate Minute Book sets out a ledger of directors, officers and shareholders. It also has a record of all decisions that were made by the directors and shareholders, and generally a copy of all agreement used. The Minute Book can show the corporation’s history in full.
  4. Court searches – Searches at various courthouses to see if the corporation or its owners were ever involved in a lawsuit.
  5. Tax compliance checks with CRA and Ontario Ministry – Used to ensure that the corporation and its owners have paid all taxes. Otherwise, you would be buying a business where you would have to pay taxes on behalf of the previous owners.
  6. PPSA searches – A search into the Personal Property Security Register, which is where creditors register any loans that are owed by debtors (debtors are people or companies that owe money). PPSA registrations are liens on assets, which means that if the debtor doesn’t pay their debts, the creditor can claim the assets and sell them to recover on the debt owed. This search is important to ensure the assets are owned free and clear by the company.
  7. Bank Act searches – Similar to the PPSA search, the Bank Act search shows whether or not a bank has registered a lien on the corporation. This usually occurs when the bank gives a loan and wants security from the business in case the business defaults on the loan.

Want a FREE due diligence comprehensive checklist? 

We’ve created an excellent due diligence checklist for anyone looking to purchase a business and are happy to give you a copy for FREE.

Just contact us by clicking here or by giving us a call at (416) 580-0345. We would be more than happy to answer your questions and give you some guidance.

3. Prepare a Definitive Asset Purchase or Share Purchase Agreement

When a person is buying a business, they must prepare a Definitive Purchase Agreement. To prepare a Definitive Purchase Agreement, they have a choice to purchase only the assets owned by the corporation or to purchase all of the shares of the corporation.

The choice of whether to complete an Asset Purchase or Share Purchase will usually come down to the Definitive Agreement between the parties.

The Definitive Purchase Agreement

A Definitive Purchase Agreement (DPA) is a legal document that records the terms and conditions between two companies that enter into an agreement for a transaction. It is a mutually binding contract between the buyer and seller and includes terms and conditions such as assets purchased, money paid, representations and warranties (a legal word meaning “promises”), closing conditions, closing deliverables (i.e. documents needed to close), closing date, etc.

Asset Purchase Transactions

In an Asset Purchase transaction, the vendor company will sell the individual assets to the buyer, rather than selling the the entire company to the buyer. In some cases, the buyer will purchase all of the assets of the vendor company outright, while in other cases, the buyer is only interested in a select few assets that the buyer finds valuable.

The assets that a buyer could purchase include equipment, furniture, licenses, fixtures, trade secrets, trade names, accounts payable and accounts receivable.

The Advantages of an Asset Purchase

To the buyer, the benefits of an Asset Purchase transaction are:

  1. Pick and Choose Assets: The Buyer has the freedom to pick and choose which assets they would like to purchase.
  2. Eliminate Liabilities: In addition to picking and choosing which assets the buyer wants to purchase, the buyer can also selectively choose what, if any, liabilities they want to purchase.
  3. Tax Implications: Buyers prefer Asset Purchase because there are tax advantages. For one, there are ways to eliminate HST on the purchase of these assets if the buyer and seller meet certain criteria. Additionally, the buyer could take advantage of certain tax rules to maximize depreciation and reduce corporate tax payable in their company.

The Disadvantages of an Asset Purchase

To the buyer, the disadvantages of an Asset Purchase transaction are:

  1. Contracts: Contracts cannot be transferred in an Asset Purchase transaction. Instead, all contracts that the buyer wants to take advantage of must be assigned by entering into an assignment agreement. This means that the buyer will need to invest in new contracts to take advantage of the same deal that the seller had.
  2. Unknown Liabilities: Although a buyer will do its best to avoid liabilities when purchasing assets, sometimes there are unknown liabilities that the buyer doesn’t find out about until after. This can be avoided by conducting due diligence searches in advance and confirming whether or not the seller has given security in its assets to a lender. For example, this is common where a seller has taken a loan from a bank.
  3. Employee Matters: Since all of the contracts do not seamlessly transfer over to the buyer, sometimes the buyer has to deal with certain employees that decide to not sign a new Employment Contract with the buyer. This means that the buyer will have lost employees and will need to invest a lot of time, money and effort into finding, vetting, hiring, training and implementing new staff.

How To Avoid Pitfalls in an Asset Purchase Transaction

The best way to avoid the disadvantages of an asset purchase transaction and to take advantage of the benefits is to work with an experienced mergers and acquisitions (M&A) lawyer. We know what pitfalls to avoid in advance of you spending tens of thousands of dollars vetting out a transaction that you later find out was a dud.

If you’re interested in buying a business in Toronto, it would be a good idea to contact us by clicking here or by giving us a call at (416) 580-0345. We would be more than happy to answer your questions and give you some guidance.

Share Purchase Transactions

In a Share Purchase transaction, the shareholders or owners of a vendor company will sell all of their shares to a buyer. This effectively makes the buyer the sole owner of the company. 

When you purchase all of the shares of a company, you have to keep in mind that you now become the owner of everything – all of the assets, liabilities, contracts, lawsuits and everything else inbetween.

The Advantages of an Share Purchase

The advantages to s Share Purchase transaction are:

  1. Simplicity: The biggest advantage of a Share Purchase transaction to a buyer is that it is just so much simpler than individually buying the assets of a business. A buyer can purchase a business and operate it the next day as if nothing has changed. It’s the most turn key approach to buying or acquiring a new entity.
  2. More Options: With a Share Purchase transaction, the buyer has more options in terms of what they choose to purchase. This is because when a buyer purchases all of the shares, they can buy a company that already has intact contracts, employment relationships, leases and licenses and permits. In an Asset Purchase transaction, these options do not exist.
  3. Tax Implications: While Asset Purchase transactions are more advantageous to buyers, Share Purchase transactions are more advantageous to sellers. This is because the seller in a Share Purchase transaction may be able to take advantage of their life-time capital gains exemption and reduce the amount of taxes paid on the sale of their shares.

The Disadvantages of a Share Purchase Transaction

The main disadvantages of a Share Purchase transaction are:

  1. Unwanted Assets: Since a Share Purchase transaction means buying the company as a whole, the buyer may be forced to purchase some bad with the good. For example, maybe the company generates a ton of revenue and profit, but it has a large loan with a local bank to fund its operations. In this case, the buyer would now be responsible for paying this loan off. While there are some strategies to  avoid or eliminate this, they are not always guaranteed.
  2. Unknown Liabilities: Although Assets Purchase transactions also have a risk of unknown liabilities, there is usually a lot more risk when it comes to a Share Purchase transaction. This is because a business as a whole can carry a lot more risk than an asset by itself. For example, if a company is sold and then one month later that company is sued, the buyer will now be responsible for this lawsuit. This can be tricky grounds to tread.

How To Avoid Pitfalls in a Share Purchase Transaction

In a Share Purchase transaction, the best strategy is to widen the due diligence or investigation period into the business. The more you can find out in advance of making a purchase, the more risk you can allocate under the Share Purchase Agreement. This is why your Share Purchase Agreement is so important – it’s the primary document that you use to allocate risk and liabilities. 

The best way to avoid the disadvantages of an share purchase transaction and to take advantage of the benefits is to work with an experienced mergers and acquisitions (M&A) lawyer. We know what pitfalls to avoid in advance of you spending tens of thousands of dollars vetting out a transaction that you later find out was a dud.

If you’re interested in buying a business in Toronto, it would be a good idea to contact us by clicking here or by giving us a call at (416) 580-0345. We would be more than happy to answer your questions and give you some guidance.

4. Contract Review and Assignments of Key Contracts

If you’re buying the Assets of a business, you’ll want to review, analyze and confirm what contracts you are going to be assignment over to your business.

If you’re buying the Shares of a business, you’ll definitely want to know exactly what contracts you’re going to be taking as part of your purchase of the entire business – especially because you have no choice in the matter.

Either way, the typical contracts that are reviewed in a business purchase include any of the following that the buyer would be assuming:

  1. Any employment or independent contractor agreements.
  2. Lease Agreements for commercial property
  3. Equipment rental/lease agreements
  4. Suppler/Manufacturer Agreements (if the business sells goods)
  5. Client contracts
  6. Franchise agreements


Failing to review of any of these important contracts could mean that you will find yourself in a contractual relationship that you didn’t want. Alternatively, you might have agreed to terms that are disadvantageous to you and that you cannot change after the fact.

How We Can Help With the Purchase or Sale of your Business

With our strong commitment to our clients, we build extended client-care solutions providing much more than corporate advice. Partnering with independent specialists in other practice areas, we ensure our clients only ever work with one cohesive team throughout a deal.

Every client has unique legal needs. Hansra Law recognizes the differing challenges faced by these investors, while business purchase attorneys in Toronto offer corporations with a 360-degree view of the market across mergers & acquisitions (M&A) and equity offerings. Large mergers bring their own challenges. Exceptional knowledge and genuine experience of the Canadian M&A market means that whatever the target, we can support our clients in navigating the process.

National reach doesn’t just mean owning physical sites across the country. From supplier relationships to acquisition financing, whatever your national interests, our business sale lawyers in Toronto will advise on every aspect of your transaction. We offer a seamless service in the way that matters most to you and your business purchase or business sale.

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