Risky Business

Woodbridge corporate and securities lawyer, Joseph Chiummiento, of Core Lawyers, discusses the biggest risks when buying, selling or merging your business – the people.

Buying, selling or merging a business can be as stressful as buying your first house or changing careers.  One of the key considerations is to look beyond the numbers and to understand the “fit” between you and the people involved with the business post-closing of the transaction.

Buying or Selling a Business – People Risk

When buying a business, most owners, entrepreneurs and managers often worry about the numbers and the unknown elements that did not come up in due diligence reviews: the risks associated with finding out what skeletons may lie in the closets of a target seller/vendor/merger of a business.

Few entrepreneurs, however, consider a look beyond the numbers to shift their focus toward one of the biggest risks in such a transaction. When we talk about “fit”, we try to ask questions to better understand the personality and historic relationships the business you are buying or merging with has with its: employees, service providers, creditors/suppliers, bank, landlord and ultimately its customers.

When merging or buying, you are also acquiring the culture of the target company, and it is important to consider how that might impact the culture you are trying to create, or what might happen when the two cultures confront each other.  Understanding how the legal agreements will help you promote the desired culture is usually good to know before closing the corporate transaction.

Asset Purchase vs. Share Purchase

In any transaction buyers and sellers are driven by different motivations that impact the type of sale.

Sellers typically prefer a share sale so that they can benefit from using a lifetime capital gains exemption – which means pay no tax on the funds you receive for selling your shares.  Of course, a seller must qualify to use the exemption and meet a three part test set out by the Canada Revenue Agency, it is best to have your accountant work with your lawyer and advise if you qualify.

Buyers normally prefer asset purchases.  Setting a value for the assets allows your accountant to later depreciate certain assets (not all) and provides an effective write down of income and accounting purposes in the years that follow.  Generally, in an asset sale you are not buying the liability of the company in a purchase, whereas in a share sale you are getting everything.

This means in a share sale you would inherit potential and actual lawsuits, whereas in an asset sale that is generally not the case.

Issues in a Sale, Purchase or Merger

Some specific issues a lawyer will consider in any corporate M&A transaction are:

• Does the lease allow for the change of control in an acquisition or merger
• What liability exists and relates to the employees being affected by the transaction
• What type of liabilities exist with the bank, other creditors

When faced with the decision of selling, buying or merging your business, these key considerations deserve a careful analysis to ensure you take the best possible course of action so that business doesn’t turn into risky business.

If you want to learn more about the ins and outs of business transactions please feel free to get in touch with me for a no-obligation consultation.

Direct Line: 905.851.8180 ext. 2

Email: joseph@corelawyers.ca