Buying and Selling a Business

Buying and Selling A Business

Acceleration Clause / 7
Accounts Receivable (value of) / 11
Agents Commissions / 5
Agreements
Asset Purchase Agreement [2.07] / 9
Allocation of purchase price / 10
Assumption of Liabilities / 10
Closing Dates / 4
Conditions Precedent / 14
Covenants (seller, buyer) / 12, 13
Default Provisions / 11
Drafting (3 considerations) / 9
Description of assets/K / 10
Effective date / 11
Environmental Matters / 12
Exclusions / 10
Goodwill / Name Change / 6, 12
Material K / 10
No default to K if sell / 11
Option to purchase (bind’g/non-bind’g) / 3
Pension funded / 11
Reps/Warranties of the seller / 11
Residency / withholding / 12
Share Purchase Agreements [2.08] / 14
Indemnity Clauses / 16
1 Tier of tax / 165
Purchased shares / 14
Rep’n/Warranties: PL tax envi / 15
Sale Price (earn-out formula) / 14
Schedules (fin’l, non-comp, emp) / 14
Subject Matter / 4
Valuation formula, principles / 11
Allocation of the P/P / 10
Asset Purchase vs. Share Purchase [2.04] / 4-6
Advantages of / 9-10
Consent transfers / 6
Conveyance costs/agent commission / 5
Description of Assets / 10
Disadvantages of / 10
Employees / 6
Good Will / 6
Incentives to buyer / 9
Liabilities/Encumbrances / 5
Minority interests, s/h undertaking / 6, 9
Partial sale, Spin-off / 5
Taxes: income, sales / 5

Assumption of Liabilities by Buyer in Purch K

/ 10

Authority to Sell

/ 11

Authorized Capital (Reps and Warrs re)

/ 15

Buyer [2.07 - 12]

Asset Purchase (reasons for pref’ce) / 4-6, 9
Assumption of Liabilities in Purch k / 10, 13
Checklist / 21
Closing / 4
Consents, Re / 13
Covenants / 2, 13, 17
Continuation of the Bus, Re / 13
Employment, Retain Existing Ks of / 13
Financing, 12 / 7, 13
Representations and Warranties / 2, 13, 16
Closing Procedures / 21
Company Act s. 103 (Guarantees) / 7

Conditions

/ 16-17
Conditions Precedent, sample / 14, 16

Consents to Transfer

/ 6, 16
Contracts, assignment to Existing / 12,13

Contributory Benefit Plan

/ 11

Conveyancing Costs (assets v. shares)

/ 5
Corporate Status / 6

Covenant of Indemnity

/ 13
Customer Base (if 50% of revenue comes
from 4 clients or less) / 2
Damages against seller, Indemnity / 13

Default

/ 8

Description of Assets

/ 10

Determination of the Purchase Price

/ 11
Doctrine of restraint of trade / 17

Documents 2 b Delivered

/ 14
Drafting Agreement Considerations / 3, 9
Due Diligence / 2, 8-9
Earn out Formula / 14
Effective Date / 11
Employment Agree’ts (asset v. shares) / 6,11,12-13
Environmental concerns/audit / 12
Equity Financing / 7, 8
Escrow of shares / 7, 15
Family Relations Act / 20

Financing

/ 7
Equity Financing / 7, 8
Seller Financing / 7, 15
Third Party Loans / 7, 8
Guarantees in seller Financing s.103 / 7, 15
Goodwill / 6, 12
Employee Considerations, ESA / 6
Financing (asset v. share) / 7-8
Indemnity Clauses, guarantee of / 13, 16
Indian Act / 20
Interest / 7
Investigation (due diligence) / 2, 16
Investment Canada Act / 16, 19
Leases / 6
Licences (consent req’d asset or share sale) / 6
Minority Interests (assets v. shares) / 6
Name Change of Seller / 12
Negotiating and Deciding on a Structure / 3
Non-Competition Clause / 17
Partial Sales (assets v. shares) / 5
Price
Allocation (in asset sale) / 10
Determination of / 11, 14
Forms of satisfaction / 14-15
Recision / 17
Release of seller in Asset Purchase / 11

Representations and Warranties

Authority to Sell / 11
Authorized Capital / 15
Buyer's (12) / 13
Contributory Benefit Plan (asset Sale) / 6,11,12-13
Default Provisions / 11
Family Relations Act / 20
Residency of Seller / 12
Seller’s (10) / 12, 15-16
Survival of / 13, 16
Residence of Seller / 12
Resol’ns Closing Proced’s Min’y Interests
Restraint of Trade Doctrine / 17-18

Restrictive Covenants

/ 17-18
Sale Price / 14
Sales Tax (5.a) –Social Services Tax (13.b) / 5, 13
Searches, common, investigations / 8-9
Security, forms of / 7, 15

Seller [2.02]

Acceleration Clause

/ 7
Closing (prepar’n of docs for) / 4
Covenants / 7, 12, 16

Due Diligence Obligation

/ 2-3

Duty to Obtain Consents and Sign Docs

/ 4

Default

/ 8
Financing / 7-8

Guarantees

/ 7

Interest

/ 7

Payment Clause

/ 7
Representations and Warranties / 11, 15

Residency

/ 12

Security, 10

/ 7, 12

Share Purchase vs. Asset Purchase

/ 4-6
Authority to sell / 14
Consent transfers (f) / 6
Conveyance costs/agent commission (c d) / 5
Employees (i) / 6
Good Will (h) / 6
Leases, licences (f) / 6
Liabilities/Encumbrances (b) / 5
Minority s/h/ Undertaking (g) / 6, 9
Price / 14-15
Schedules to Share Purchase K / 14
Spin-off, partial sale (e) / 5
Taxes: income, sales (a) / 5
Structure of Transaction (who, what, $) / 4-8
Subject Matter of Transaction / 4
Survival of Reps, Warranties and Covenants / 13, 16
Tax Considerations Asset v. Shares / 5, 164-175
5 Non-tax reasons: asset v. shares / 164
Accountant’s Role / 165
After-tax proceeds / 165
Allocation of purchase price / 166
Depreciable/non-depreciable / 171
GST / 173
Reserves of tax / 173
Residence / 174
Rollover, tax-deferred transfers / 173
Tax Treaty / 175
Buyer’s Tax Position / 168
Asset advantage –6 (1.a-f) / 5, 168
Capital gains / 168
Financing/ earn out / 170
Goodwill / 172
Loss carry 4wards- acquisition ctrl / 169
Post-Closing / 4
Recapture / 171
Rollover / 173
Small Business Deduction / 169
Tax Liabilities / 170
Tax-free accounts / 166
Seller’s Tax Position: / 165
2 tiers v. 1 tier of tax / 165
General Anti-Avoidance Rule / 165
After tax proceeds calcul’n / 165
Allocation of p/p (CCRA) / 166
Calculation tax, net after tax yield / 166
Capital gains exemption: / 167
CCPC, Tests: / 167
Asset Use Test / 167
Fair market value test / 167
Holding period test / 167
Seller – Alternative Minimum Tax (AMT) / 167
Cost of assets V-day / 166
Non-resident / 174
Tax free accounts / 166
Transaction / 2-4
Overview of a Transaction / 2
Investigations, checklist / 2
Negotiation of structure / 3
Outline agreement (option) / 3
Preparing/signing / 4
Closing / post-closing / 4
Structure of Transaction / 4-8
Subject Matter of Transaction / 4
Undisclosed liab/encumbs (asset v. shares) / 5

Why does the Buyer Prefer an Asset Sale While the Seller Prefers a Share Sale?

Pages 9-14 (Practice Materials)

Buyer – Assets

Disadvantages of Asset Sale
B must pay GST/SST on assets – pp.5, 10.
Buyer may need 2 pay further taxes and commissions on some assets (e.g. real prop’y – land transfer tax, RE commission, conveyancing fees), p. 5

Pages 14-17 (Practice Materials)

Seller – Shares

Disadvantages of Share Sale
Must sell all shares. This may be problematic if a group of minority shareholders is unwilling to sell their shares. They may be entitled to exercise minority remedies under the Co. Act – p. 6; could delay sale
More document-heavy closing than share sale – p. 10.

Must obtain many 3rd party consents (many difficult to obtain) – p. 10.
Employment contracts will terminate; not assignable. Must negotiate new contracts for those employees that the buyer wishes to keep in employ – p.12.

Advantages of Asset Sale
B may only need to deal w/ 1 seller rather than obtaining unanimous consent of all SHs (however if resolution passed against the will of the minority shareholders, SH dissent rights could be exercised **-p.9)
Tax advantages (see Buyer’s Tax Position) – p. 5, 168.
B can “cherry-pick” assets that (s)he wants.
B needn’t worry about inheriting liabilities of S to the same extent as in a share sale (however may still give rise to environmental hazard claims when prop’y is b’g purchased)
B needn’t necessarily keep all emp’ees (however (s)he should beware of oblig’ns under collective agree’ts & LRA as (s)he may b bound by the collective agree’t or subject 2 a successor’p claim under the Act). – pp. 6, 13.

B inherits liabilities of S when buying shares (must worry about title to assets of co., charges against land, professional neg’ce claims, environmental waste, etc.)
B will need to get consents to transfer leases, licences, permits – p. 6.

Advantages of Share Sale
Tax benefits (income & sales tax) – p. 5, 165.
Seller can (to some extent) off-load liabilities by selling shares (subject 2 guarantees and set-off rites) – p. 5.