If you are selling or buying a business in Ontario, you need to make important decisions.
Is the deal an asset purchase or a share purchase? You also need to have a legal agreement about the purchase or sale that indicates the obligations of each party.
These are important for the transaction to go smoothly. Business lawyers in Ontario are very familiar with the processes related to the sale or purchase of an existing business and can help you with the legalities.
Lawyers will ensure you do the required due diligence and that your interests are protected at all costs.
Find the right lawyer to assist you with buying or selling your business in Ontario by filling out the short online form on this page, free of charge!
Are you planning on becoming a business owner? You can buy an existing business or create a startup in Ontario.
Many experts agree that buying an existing business is less risky than starting one from scratch. Thus, many people who want to become business owners choose this road to entrepreneurship.
If you decide to buy an existing business, the sale agreement will indicate a price for the assets, inventory, and if applicable, goodwill.
The amount to be attributed to each business asset may be indicated in the sale agreement. If it is not, you have to decide how much to attribute to each asset to arrive at its Fair Market Value. The balance of the sale price after computing the value of the assets can be allocated to the cost of goodwill.
How buying and selling a business in Ontario works
Buying and selling a business is a complicated transaction that requires a lawyer to draft the agreement, comply with the terms of the agreement, and prepare the closing documents, as needed.
Depending on the nature of the business, various permits and licenses may be required for the business operations.
In Ontario, you can buy a non-publicly traded company in two ways;
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Asset Purchase: Buying all or a huge part of the business assets such as inventory, trademark goodwill, equipment, buildings, etc.
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Share Purchase: Buying the issued and outstanding shares of a business.
As an example, a proprietor of a store in a commercial building can choose to:
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Sell all of the equipment including the business name and inventory (Asset Sale), or
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Sell all of the shares of the business. (Share Sale)
Asset Share VS Share Sale
Agreement for the Purchase and Sale
This agreement is negotiated and signed as an Asset Purchase Agreement or a Share Purchase Agreement.
For an Asset Purchase Agreement, only the assets of the business are sold.In a Share Purchase Agreement, the shares of an incorporated company are sold to a buyer.
Either way, the agreement must be drafted by a lawyer. Oftentimes, a lawyer is hired to draft a letter of intent (LOI), be present during the negotiations, and draft the agreement.
Whether it is an Asset or Shares Purchase, the transaction will have a closing date, usually 30 to 60 days after the signing of the agreement . In this way, it is a lot like a real estate purchase or sale.
Conditions and Closing Documents
The lawyer must complete the closing of the transaction by meeting the conditions of the agreement and preparing the closing documents.
The closing could be conditional (meaning subject to certain items). It could be dependent on the buyer being approved for financing or after the review of the financial documents is completed with positive results. These terms can be specified in the agreement.
When the conditions have been met, the deal becomes firm and closing documents are filed to effectively transfer the business.
Are you looking for secure financing for buying a business in Ontario? You can visit the Canada Small Business Financing Program for more information.
Pros and Cons of Asset Sale vs. Share Sale
Are you wondering which one is better – an asset sale or a share sale?
In an asset sale, the buyer and the seller can decide on which assets to transfer, tangible and intangible. These can include real estate, inventory, and equipment. Intangible assets may include contracts, leases, intellectual property, permits, and goodwill.
Asset Sale Benefits for Buyers
An asset sale is advantageous to the buyer because he does not need to assume all of the business liabilities. He is also generally not required to retain all of the employees. However, the seller may require the buyer to retain existing employees to prevent wrongful dismissal claims.
Tax benefits can also be gained by the buyer in an asset sale because he can increase the tax cost of depreciated assets to the current market value to reduce future tax obligations.
The disadvantage of an asset sale for the buyer is that taxes of the seller go up which could result in a higher purchase price.
Asset Sale Benefits for Sellers
A seller can increase the purchase price of the business in an asset sale. The seller can maintain some of the liabilities which can be presented as an increased purchase price.
Is an asset sale disadvantageous to a seller? In general, an asset sale is more complicated than a share sale as it involves the transfer of individual assets. It requires more paperwork to effect the legal transfer and the process can be time-consuming and costly.
Certain liabilities will also remain with the seller.
Share Sale Benefits for the Buyer
If the company being sold has significant goodwill attached to it, it may be better for a buyer to continue to operate it under the existing company name.
The selling price in a share sale may also be lower because the buyer assumes all of the business liabilities.
The primary disadvantage of a share sale to a buyer is the fact that he will assume all of the liabilities of the company. Due diligence must be undertaken to evaluate the risks and liabilities. A buyer may demand to be compensated by the seller or a third-party before finalizing the purchase.
Employees usually remain after a share sale is completed. Some existing employees may choose to leave, resulting in severance payments for which the buyer would be liable.
Share Sale Benefits for the Seller
A share sale is more straightforward than an asset sale as only shares are transferred. It could, however, require consent from third parties such as with loans or lease agreements.
Taxable capital gains and other taxes can be reduced for the seller overall.
Because taxes are reduced, one disadvantage is that the buyer may want to negotiate or lower the selling price. The buyer may also require warranties and indemnities due to the risks he is assuming.
The Key Takeaway
The buyer and the seller can choose assets to transfer in an asset sale. Tax-wise, it is more advantageous for the buyer.
A seller may prefer a share sale because the liabilities are automatically assumed by the buyer. The seller would also benefit from tax advantages.
Things to Consider When Selling or Buying a Business
When you find a business for sale that you are interested in acquiring, you will need to take a few things into account.
1. The Business Structure
The type of business structure you are purchasing will affect your future operations. You need to think about whether you are buying merely the assets, shares, or equity of the business.
You can also decide to restructure the business after the acquisition, for instance, incorporating the business post-acquisition.
An experienced business lawyer can advise you in terms of the potential liabilities, financing strategies, and regulatory requirements.
2. Due Diligence for Buying a Business
Before buying an existing business, you must investigate the business and the seller thoroughly. Being informed of the risks and problems involved will help you determine if you are making a good investment.
Again, a business lawyer can help you analyze the contracts possessed by the business so you can avoid problems and liabilities. These include lease agreements, licensing agreements, and employment contracts.
Below is a due diligence checklist to guide you:
- Business contract agreements
- Insurance Coverage
- Assets and Properties
- Planning and Advertisements
- Financial Information
- Employee Benefits and Relations
A business lawyer can help resolve pending issues such as outstanding bills, lawsuits, labor cases, tax issues, etc.
Always consult a business lawyer before buying or selling an existing business to ensure a profitable transaction.
3. Financing
When conducting due diligence, you must closely consider the financing you will use for the business acquisition.
It must consider the business value and what you can afford to pay. You must have a formal business valuation by a third party. You can choose to use personal assets as collateral for a business loan or explore government-backed financing programs for your financing needs.
4. The Purchase Contract
After doing your research, the next step is the purchase contract. As a buyer, you will be responsible for the legal documents and send them to the seller’s lawyer for review.
A Letter of Intent (LOI) can be drafted by your lawyer as well as a non-disclosure agreement, if relevant. The purchase agreement is the primary legal document that will concern both parties and should follow the laws in Ontario.
The agreement can include the seller’s representations and warranties and a non-competition clause (the seller will not open a new business that could jeopardize the existing business), among others.
The buyer and seller must draft and sign the formal purchase agreement to close the business deal.
The GST/HSTfor Buying a Business
If you buy an existing business or a part of a business and acquire at least90% of the property that is reasonably necessary to operate the business, you and the seller could apply to waive the GST/HSTpayable on the sale by accomplishing FORM GST44 for the Acquisition of a Business or Part of a Business.
You cannot use thisoption if the seller is a registrant and you are not a registrant. In addition, you need to purchase all or a substantial part of the property, and not just individual assets.
You must be able to operate the business with the property bought under the sale agreement . You must fileFormGST44on or before the day you need to file theGST/HSTreturn for the first reporting period in which the GST/HSTon the purchase is due.
Even when you use this option, GST/HSTwill still apply to a taxableservice by the seller; a taxable supply of property by lease, licence, or other arrangement . It will also apply if the buyer is not aGST/HSTregistrant to a taxable sale of real property.
How to sell an existing business in Ontario
If you are selling your business, you will need to take certain steps, too. To complete the sale, certain aspects are essential to keep in mind.
Succession Planning
You need to create a succession plan before you sell the business. This ensures a smooth sale and transition of the business.
It is a plan that outlines every step of the way as you exit the business and covers all aspects including financially securing stakeholders, protecting the operations of the business, and having contingency plans for emergencies.
The Sale Structure
As the seller, you must determine the structure of the sale. You will need to conduct a business valuation of the physical and intangible assets to get the business value.
For a management buyout, the typical process starts with a company analysis, the negotiation of the selling price, and financing the buyout.
As mentioned earlier, you can structure the sale as an asset sale or a share sale. Both structures have pros and cons that must fit any seller’s goals or intentions.
Non-Disclosure and Confidentiality Agreements
As a seller, you want to protect the business from potential buyers. Several buyers may express interest but not close the deal. You must protect your business information and ensure they don’t get leaked.
Contract
While buyers will diligently draft a contract, you must also be diligent in negotiating it.
A contract can be negotiated at the start while lawyers from both sides go over it. You will agree with the buyer on the closing date which is when the buyer pays the selling price and submits closing documents to transfer the assets.
Choosing the method for buying or selling a business is an important decision . Business lawyers from JuriGo can help you evaluate your options based on your goals. They are experienced in the buying and selling of businesses anywhere in Ontario and can provide high-quality services for your specific business needs.
Fill out the free online form on this page to find the best business lawyers for buying or selling a business in Ontario!
Conditions Related to an Agreement of a Business Purchase and Sale
The conditions in an Agreement of a Business Purchase and Sale can vary depending on the nature of the transaction.
Some of the common conditions in favour of the buyer include obtaining adequate financing, the review of financial and legal documents, and the landlord’s consent to the transaction.
The role of a business lawyer is critical in drafting the Agreement. He will ensure that the necessary conditions to protect your interests as a seller or buyer are included.
Closing documents required in a Share Sale
On the agreed-upon closing date, various documents need to be drafted by a business lawyer to effect the sale.
Below you will find a list of some of the closing documents that need to be prepared:
- Authorizing Resolution of the Corporation to enter into Agreement
- Consent to the Transfer of Shares
- A Resolution of the Board of Directors of the Corporation authorizing the transfer of shares
- Endorsement of Share Certificates
- New Share Certificate in favour of the Purchaser
- Resignation of the Vendor as a director and officer
- Resolution for the election of the Purchaser’s director and officer
- Indemnity Agreement
- 116 statutory declaration by the Vendors as to their age and Canadian residency
- Statutory declaration by the Purchaser as to residency
- A Certificate of Warranties
- Ownership of all vehicles
- Certificate of Mechanical fitness of all vehicles
- Undertaking by the Vendors’ solicitors to supply funds held to pay off debts and obligations
- Non-Competition Agreement
- A Receipt for the payment of the purchase price
- Resignation of the Vendors as directors and officers
- PPSA registration
- Certificate of Status of the Corporation
- Certificate of Status of Incumbency
- Form 1 Notice of Change
Business Lawyers as Experts on Drafting Legal Documents
As you can see, the required documents for the closing are many and require assistance from competent and experienced business lawyers.
It is critical to have all necessary documents ready to ensure compliance with the closing date. Speak to a reputable business lawyer to help with a share sale using our short online form!
How much does a lawyer charge for buying or selling a business?
If you sell a property in Ontario, the seller may pay from 3% to 5% of the selling price to the agents who handled the transaction. Both the buyer and seller will also need to hire and pay a lawyer to handle the closing of the transaction.
The same goes for buying or selling a business in Ontario. The difference is that the cost may be a bit higher. A business lawyer can function as an agent and a lawyer and complete the agreement of purchase and sale.
The final cost will depend on whether the transaction is an Asset Sale or a Share Sale and how much due diligence the lawyer needs to do.
Lawyers from different firms also have different rates depending on factors like track record, experience, and reputation.
To get an accurate quote from business lawyers in your area, please fill out the short online form below. Compare rates and save time and money!
Get Help for Buying or Selling a Business in Ontario
Whether you are buying or selling an Ontario business, consulting a reputable business lawyer for structuring, negotiating, and closing the transaction is highly advisable.
Lawyers know the laws related to business acquisitions and will ensure that the transaction is legal with terms that are favourable to you.
You will need a lawyer for certain situations such as:
- Choosing the right business structure;
- Leasing requirements;
- Buying an existing business;
- Contract review;
- Etc.
Find the best business lawyer from JuriGo to help you with your transaction using our short online form below, free of charge.