Has the time come for you to step down as the head of your company? Are you, perhaps, a young entrepreneur who is ready to seize the next business opportunity? In either case, it is imperative that you know the main steps involved in buying and selling a business in Quebec.
Buying or selling a business is considered complex but with the help of a JuriGo partner, it can be a breeze!
All it takes is one wrong move to nip it in the bud, and after years of running a business, there's no point in describing the frustration this would cause.
But don't worry, JuriGo is here to guide you through all the steps involved in buying and selling a business in Quebec!
Buy how is a company sold in Quebec? Assets, shares, mergers and more!
When a business is about to be sold, the first question that should come to mind for both the buyer and the seller is: how will the transfer take place? This may sound trivial, but it is a question of the utmost importance. The main options are to sell the assets, and the shares, or to merge the two entities. Which of these options is right for your transaction?
Buying a business through an asset transfer involves selling all or part of the assets that make up the business. For example, a property management company could decide to sell some of its buildings to the acquiring company. In doing so, the buyer acquires the ownership of the assets, without however continuing the legal personality of the company which is one of the biggest advantages of the sale of the assets.
On the other hand, the sale of assets has less advantageous tax consequences for the seller since he does not have tax exemption on the capital gain as opposed to selling the shares which has taxz benefits.
On the buyer's side, the opposite is true as he or she can amortize the purchase over time to reduce the tax impact on his or her own purchase as a capital gain.
The purchase of shares is a much more comprehensive legal alternative. By transferring shares, the buyer is thereby "substituted" for the seller; he takes the seller's place and therefore assumes full responsibility for the business he has just purchased. Rigorous due diligence is required.
For example, a co-contractor of the business who would bring a claim after the sale would turn against the buyer and not the seller. For the seller, the sale of shares is certainly the most advantageous avenue from a tax point of view because of the capital gains exemption granted.
A merger occurs when two companies are combined to form a single entity while an acquisition consists of a large company acquiring a smaller one with the same objective. A complex process is involved in both scenarios as a commercial lawyer is required to file the articles of merger with the Registraire des entreprises du Québec.
In Quebec, there are two options for a merger: ordinary and simplified merger. The simplified merger mechanism consists of the acquisition by a parent corporation of the subsidiaries over which it has control.
Its main advantage is that, unlike an ordinary merger, it does not require the preparation of a merger agreement or the approval of the shareholders of the two merging companies. Only the approval of the two boards of directors concerned is required, thus greatly simplifying the process.
Finally, the sale of the business is another solution to consider for both a seller and a potential buyer. It is similar to the sale of assets in that the transfer of the business consists of selling all of the assets needed for the operation of the business in question. However, the sale of assets is a much broader concept.
It gives the buyer the right to use the equipment, inventory, clientele, and assets of the acquired business . Above all, assets include intellectual property rights such as trademarks. The acquisition of assets, therefore, grants a wide range of rights.
The answer to this question can only be obtained from a lawyer specializing in business transfers! He or she will analyze your business needs and guide you toward the best solution.
In the meantime, JuriGo presents the main steps in the sale of a business in Quebec!
A step-by-step guide to buying & selling a business
Since selling a business involves important legal and financial aspects, do not be surprised to learn that it is a long process that is carried out in several stages. This is a necessary evil aimed at protecting your interests and optimizing the purchase or sale price. Here is an overview of the process and how a lawyer can assist you!
1. Confidentiality Agreement
The transfer of a business is not like a real estate transaction such as buying a house. Although negotiations take place and an offer to purchase is needed in both situations, the information is of a much more sensitive nature in the case of a business sale.
Before negotiations begin, it is important for the buyer to sign a confidentiality clause to protect the seller. In some situations, this clause should even be bilateral and oblige the potential seller to keep the negotiations secret, especially when the buyer is a big player in the same industry.
2. Determine the valuation method and negotiate
Before sitting down at the negotiating table, the parties to the transaction should agree on the best way to assess the value the business. In doing so, both the buyer and seller will be comparing apples to apples and oranges to oranges.
There is no specific valuation method that is superior than others, only methods that are more appropriate to the specific circumstances of the business. To do this, the parties should use the services of an independent business valuator who will use one of the methods agreed upon by the parties, namely:
- Fair market value
- Forced or liquidated liquidation value
- Discounted Cash Flow
- Market-Based Methods
Once the business value is determined, a business lawyer comes in to negotiate the purchase/sale price based on the independent appraiser's report. However, this valuation is only one of several inputs and there is no guarantee that the valuation price is the final selling price, for better or worse.
3. Letter of Intent and Conditional Offer to Purchase
Once the parties have agreed on the essential terms of the business transfer, it is time to issue an offer to purchase or a letter of intent. What is the difference between the two?
The distinction is sometimes understandable, but in theory, the letter of intent is a document that sets out the "framework" of the transaction without representing a formal commitment. In practice, it often precedes the formal offer to purchase. On the other hand, once an offer to purchase has been accepted, it constitutes a binding pre-contract between the seller and the buyer.
What should a commercial offer to purchase contain? An offer to purchase should contain all the essential elements of a proposed contract, i.e. the price, the property being purchased, the method of payment, and the date of payment. Here's what that means in a business sale.
To avoid confusion, all assets being acquired and classes of shares being purchased should be broken down in the offer to purchase.
Whatever the payment terms are, they should be disclosed in the offer to purchase, especially if financing or a balance is provided.
The offer should always contain a satisfactory due diligence clause. This is equivalent to the inspection clause in a home purchase offer. If the due diligence reveals a defect in the business to be purchased, the offer to purchase and the price quoted will be rescinded, allowing you to renegotiate downward or simply withdraw from the transaction.
Depending on the field of activity of the company concerned, the non-competition clause may also be a requirement of the purchase offer. This will prevent the seller from transferring their business to you just to start a new one in the same field once the deal is closed.
Stipulating a deadline is essential! An offer to purchase is binding on the parties, but it is not the same as the intended contract, which is the official sale of the business. The parties therefore have the option of stipulating a lapse of time after which the sale will be considered null and void if the buyer and seller have not yet signed the deed of sale.
4. Due Diligence and Financial Review
What is the purpose of due diligence? Due diligence is one of the most important steps in the sale of a business. This is where you find out if the business you have offered to buy is indeed free of any potential defects.
The main objective of due diligence is to reveal any potential legal, financial, tax, and accounting problems, which involves analyzing the most important documents of the company:
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The minutes of the meetings of the company
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Agreement between shareholders
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Consultation of the Registry of Rights (RDPRM and Land Registry)
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Analyze the most important contracts of the company
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Monitor the employment contracts
Is it true that due diligence is less important in a sale of the assets compared to a sale of shares?
Not at all! While it is true that due diligence may take longer in the case of a share sale due to the complexity of the corporate structure, due diligence on an asset sale is just as important.
The assets of the business may be encumbered by mortgages, liens, or even owned by another party without your knowledge. Due diligence will ensure that you are buying a property with a clean title.
5. Financing and Corporate Restructuring
Has the due diligence conducted found no potential problems on the horizon? Has the offer to purchase become final, complete, and approved? It's time to put the closing in motion by moving to the financing stage. What are the financing options when buying a business in Quebec?
One example is financing secured by the assets of the business! Businesses have the advantage of being able to mortgage their personal property, which individuals cannot do, thus opening the door to interesting financing options.
Lenders are also able to offer financing secured by the funds generated by the business if the business does not have sufficient assets to pledge as security. The ability of the company to repay the debt will be analyzed in great detail before the loan is granted.
It is also possible to use a balance of sale from the seller or a down payment from the buyer. Financial institutions are among the first sources of financing to be consulted when buying/selling a business.
6. Closing the Business Purchase and Sale Agreement
You're finally at the finish line- your offer to purchase is closed, due diligence has been done, and financing has been obtained. All that remains is to make it official by signing the official sales contract. Your lawyer will take care of drafting the contract, allowing you to quickly take possession of the business acquired.
It is also possible to appoint a notary during the signing in order to record the transaction and transform the sale into an authentic act.
What happens to employees and employment contracts once the business is sold?
The sale of a business does not terminate the employment contracts as provided for by Quebec labour laws. This means that an entrepreneur who has just acquired a business cannot dispose of certain employees. He is, however, not entirely bound by the obligations arising from these contracts.
Thus, while he may not dismiss employees with more than 2 years of continuous service without just and sufficient cause, he can give sufficient notice to the employees he chooses to dismiss. However, this represents a substantial amount of money, not to mention the potential for recourse when the principles of labour laws are not followed.
The Act respecting labour standards provides that the seller and the buyer are jointly and severally liable for the contracts entered into by the buyer. The employee can turn against either of them to obtain compensation.
Any business purchase/sale agreement should clearly indicate the obligations of each party with respect to employment contracts arising from the sale of the business in order to avoid liability to employees who are dismissed following the transfer.
Find a business lawyer with JuriGo
Selling a business takes years of preparation with the right professionals. Buying a business, on the other hand, requires exhaustive due diligence to avoid "getting passed a lemon" or worse, being held liable for the seller's debts and contracts.
In either case, a business transfer lawyer should spearhead your transaction. With his or her keen legal and business knowledge, he or she is the driving force you need for a successful business transfer.
Are you unsure where to find a business lawyer who is indispensable in a business sale or purchase? JuriGo is the place to start the process!
Fill out our form at the bottom of the page and you will be connected to a reliable and experienced business lawyer, free of charge!