Legal considerations when selling a business | Sponsored by BDO’s Scott Conner

You should always consider getting legal advice when contemplating the sale of your business, but when is the best time to engage legal counsel? The classic lawyer answer is ‘yesterday.’

Having a lawyer with considerable deal expertise is key.  Here’s a general overview of the customary transaction documents you can expect to see throughout a purchase and sale process:

Non-disclosure agreements

A non-disclosure agreement (NDA) is a critical first line of defence to protect your confidential and proprietary information. During the initial stages of a sale process, buyers will look for the opportunity to review every aspect of your business—from financial statements to supplier, customer, and employee information.

While there isn’t a generally accepted standard form of NDA, it is important that you carefully consider the following inclusions:

• Use and disclosure—The NDA should state the purpose of the information’s usage and restrict its use for evaluating a potential transaction.

• • Non-solicitation provisions—It’s common to have a provision that prevents interested parties from stealing customers or recruiting employees.

• Enforcement period—The NDA will be enforced for a certain amount of time and the length should be as long as possible. 

Letter of intent

A letter of intent (LOI) generally outlines the framework upon which the parties are willing to proceed to negotiate a definitive agreement.

The binding provisions will usually include an exclusivity period that gives a potential buyer the ability to complete their due diligence without fear of a seller otherwise shopping the deal to other potential suitors.

The non-binding provisions will usually include the proposed economic details of the underlying transaction, and whether the buyer intends on purchasing shares, assets, or a combination of both. There may also be information on the structure of the deal, including the purchase price and how it will be paid (such as in the form of a holdback or a post-closing earnout).

Ultimately, a properly drafted LOI should benefit both sides, as it establishes a level of intent and understanding upon which the parties have agreed to continue their good-faith negotiations.

Legal due diligence

Due diligence provides an opportunity to uncover and identify financial, legal, and/or operational matters that may impact a business.

Purchase agreement

This is the binding contract setting out exactly what the buyer is purchasing, the purchase price, how it is paid, how much is tied to post-closing milestones, and the closing date.

The purchase agreement may also contain indemnification obligations, timelines, limitations, and exceptions in order to protect the selling entities from potential trailing liabilities. It will typically include provisions for the buyer that shows how issues, disputes, and/or problems are to be settled.

Selling a business can be complicated. Starting with integrated legal and tax planning advice is key to helping a business owner with the sale process every step of the way.

Scott Conner is an experienced tax practitioner and practical problem solver at BDO. As a partner specializing in Canadian income tax, Scott has particular specialties in private companies, planning for estates, trusts, and complex transactions. As personal tax season approaches, Scott and his team understand personal taxes are as individual as clients themselves. BDO works closely with their clients to understand their specific needs and adjust strategies accordingly. BDO partners and staff take a proactive, hands-on approach. They closely follow existing and proposed legislation to determine how it will affect individual financial goals, and provide ongoing guidance.