Lawyers for Buying a Business in Vancouver, BC

Jun 20

You’ve Found a Business To Buy What Are The Next Steps?

So you’ve decided you want to purchase a business. You see more potential success in buying a business than starting one from nothing. Purchasing a business is a great option for someone who wants to hit the ground running, and use their skills to grow a company to the next level. Once you’ve identified a company that you want to buy, what’s next?

Start Researching Financing Options

The first hurdle you’re going to come across is money. Buying a business isn’t cheap, but luckily there are a number of ways you can fund your business purchase. The simplest form is by using your own cash to self fund the purchase. However, this may not be available to many people, or you might have decided that the opportunity cost of using your own cash is too high. Luckily there are some other options to consider.

A simple bank loan sounds easy to acquire, however banks don’t often approve loans for business acquisitions due to the risk. However, the Canada Small Business Financing Program (CSBFP) makes it easier for small businesses to acquire loans from financial institutions, with the maximum loan amount being $1.15 million.

If you would like to purchase an existing business under the CSBFP, the purchase of eligible assets of an existing business (asset sale) may qualify for financing, where you can finance the cost of purchase or the appraised value of the assets, whichever is the lesser amount.

You can also combine self funding and a bank loan to purchase a business through a leveraged buyout. In this structure, the assets of the business you are buying are leveraged in order to finance the acquisition.

Another option to consider is seller financing, where the owner of the business loans you money to buy their business. There are other factors in seller financing that you want to consider other than just financial ones. If there isn’t a big market for this business to be sold in, the seller may try to offer incentives to potential buyers just to sell their business. It’s important to do all the research necessary and understand the rationale behind the seller offering financing.

Drafting an LOI

After you’ve considered financing options, it’s time to draft a letter of intent (LOI). This is a written document that outlines the commitment between two or more parties doing business together.

It’s highly recommended to seek legal assistance to draft and review your LOI to prevent yourself from unintentionally entering a binding agreement and to avoid litigation in the future.

Your LOI should contain details like the transaction structure (asset sale vs share sale), purchase price (this can be a negotiating range), assets and liabilities involved in the sale, important dates, conditions, binding and non-binding provisions, restrictive covenants and termination.

You’ve Submitted an LOI What’s Next?

Now that you’ve cleared two big hurdles, your dream of becoming a business owner is starting to look a lot more realistic. There are still a few more steps to complete before you can finalize the deal.

Due Diligence Checklist

You will want to complete due diligence when researching a potential acquisition to make sure you are making the right decision. In order to properly complete due diligence, you’ll want to take the following steps:

First, plan your process. This step in the purchase process should not be taken lightly. Taking an extra couple months to thoroughly research the company and your potential investment could prove to be a significant ROI.

While planning your due diligence process, it’s important to hone in on topics that you want to evaluate. These should include financial statements, income tax returns, lists of assets and equipment, lists of clients and suppliers, important contract information, employee’s files, leases, liabilities, licenses or patents, and any other documentation you feel is necessary to review.

The next step in the due diligence process is to identify qualified experts to help with your due diligence. Consider having an accountant and a lawyer who have experience with business acquisitions to help you analyze financial statements and conduct legal due diligence.

More often than not, the fees paid to these professionals will save you money in the long run, as professional analysis will help reduce the chance of costly surprises after you’ve purchased the business, as well as help you understand a fair purchase price.

The third step in the process is to conduct your due diligence. A comprehensive guide to due diligence is beyond the scope of this article, but there are three main areas you should be focusing on.

The first area is commercial due diligence, which focuses on the company’s business model and strategic plan, how the market is affecting the company (industry trends, technological change, legal regulation), suppliers, manufacturers and employees.

The second area is financial due diligence, which includes financial forecasts, tax returns, year end financial statements from the previous 5 years, budgets, margins, accounts payable and receivable, and all other relevant financial statements.

The third area is legal due diligence, which includes leases, past or present lawsuits, employee contracts, warranties, relevant laws and regulations, licenses and permits, and any other relevant corporate documents.

Negotiate a Purchase Price

Once you have completed your due diligence, it’s time to start negotiating. A common method for determining a purchase price is by using earnings before interest, taxes, depreciation and amortization (EBITDA). Depending on the industry your business is in, a fair sale price could be between three and six times the EBITDA amount.

However now that you’ve completed your due diligence, there will likely be factors that can influence the multiple used, or add or subtract value from what would be the fair sale price.

It is not uncommon for both parties to hire a professional valuator to set a fair price for the company. If you feel that the current business owner has an unrealistic expectation for what their company is worth, you may end up saving money in the long run by paying for a professional valuator. PVs often use 3 valuation methods to assess the value of the company.

They will use an income based approach (calculating a multiple of EBITDA), an assets based approach (calculating the value of tangible and intangible assets) and a market based approach (checking what other relevant companies are sold for).

Secure Financing

Once you’ve negotiated a purchase price, it’s time to apply for financing. If you’ve decided to apply for a bank loan with an institution that participates in the CSBFP, you can use this government tool to find a lender near you.

Drafting a Purchase Agreement

The next step in the process is to draft a purchase agreement. This is a legal contract that outlines the terms of the purchase, it includes buyer and seller identification, the price, the details of the purchase, and other important factors such as transaction details, remedies and disputes, closing details and signatures.

Asset Sale Versus Share Sale

The type of sale will need to be specified in the purchase agreement. An asset sale refers to the selling or acquiring of business resources such as equipment, raw material, cash, buildings, intellectual property, contracts, customer lists, licenses or brand value. A share sale is where the buyer comes in and buys the entire entity, assets and liabilities combined.

Here is a comprehensive beginners guide to an asset sale vs a share sale.

An important note is that the owner may be able to charge a higher price for an asset sale compared to a share sale because they cannot claim the lifetime capital gains exemption. As of June 25, 2024, the LCGE amount is $1,250,000, which means if the purchase price of a share sale is $1,500,000, the seller will save $436,473 in taxes if they live in BC and made no other income that year. Because the after tax cash on a share sale is much more than that from an asset sale for the same purchase price, the seller can charge a higher price for their company.

What Warranties Should be Included

Warranties within a purchase agreement are statements made by either party used as assurance for the other party. For example, if the business does not have any outstanding debts, the seller would include this as a written warranty which would free the buyer from any responsibilities related to it.

Warranties that you should look for from the seller include their compliance with tax legislation, asset ownership, up-to-date accounts, compliance with employment laws and the validity of their current contracts.

Warranties that the seller may want from the buyer will mainly be related to their financial capability and legal authority. These warranties are there to assure the seller that the buyer has enough money to complete the purchase and that the buyer will go through with the full payment, whether it’s a one time payment or multiple installments.

Common Pitfalls To Avoid

Reviewing a contract can get boring when you have to read all the dry fine print and unfamiliar legal jargon. It’s important to review and understand every line in the purchase agreement, which includes items like the possession date, an irrevocable clause, deposit information, and any conditions the seller has.

It’s recommended you hire qualified experts like a team of business lawyers to help draft and review your purchase agreement. This could end up saving you time and money down the road if an improper understanding of your purchase agreement leads to litigation, fines or a bad investment.

Who Should Review The Contract Terms?

If you’ve made it this far in the business deal, you probably already have a team of experts by your side. Having a business lawyer thoroughly review your purchase agreement before you sign it is an important safety precaution. The lawyer will advise you on the legal implications of the clauses and warranties of the contract, provide legal advice on important parts of your contract, and give you the peace of mind knowing that the transaction can take place smoothly.

An important note is that this is a legally binding contract, so it cannot be changed once signed unless both parties agree. If you’re trying to change your contract after it’s been signed, it’s likely for your benefit, leaving the seller unlikely to agree. Having a lawyer review your purchase agreement is a great way to double check everything to avoid the need for changes in the future.

Frequently Asked Questions

Is a letter of intent legally binding?

Because this is just a provisional agreement, it’s not legally binding. However, there may be some binding provisions within the document.

Can I back out of the deal once I’ve signed the contract?

Once you’ve signed the purchase contract, you are legally bound to the seller. However you may have written conditions into the contract that make the transaction conditional upon a certain factor, where if it’s not met, the transaction does not go through.

Do I need witnesses when I sign my contracts?

Witnesses are not mandatory for most contracts, although it is recommended to have 2 witnesses or solicitors and have them sign as well.

Can the seller start a new business in the same market as the one I’ve just bought?

You can choose to include a non-competition clause in the purchase agreement so that the seller does not compete with your new business.

Steve Parr

An entrepreneur at heart, Steve founded and sold a vacation rental company before establishing Parr Business Law in 2017, giving him unique insight into the entrepreneurial journey. Steve received his law degree from the University of Victoria in 2014 and also holds an B.A. in Gender Studies.

https://www.parrbusinesslaw.com