Whether as part of a well executed exit process or the result of an out-of-blue telephone call, once a potential purchaser (or, if lucky, potential purchasers) of your business has or have been identified it is important that the seller maintain some control of the process when selling a BC business while negotiating the actual deal and facilitating any due diligence or third-party approvals.
In this article, the second part of a series of articles that will explore the transfer of a BC business undertaking from the seller’s perspective (see Part One – Preparing To Exit here), we consider the usual second stage – negotiating the deal. Specifically, this article will outline five items worth considering after a potential purchaser has been identified but prior to putting pen to paper in order to protect the seller's business through any sale process but also increase the probability of a successful exit process and hopefully decrease the potential of a failed deal, financial loss and, perhaps, litigation.
1. Notify and/or assemble your team. Speak to your (or a) commercial lawyer and your (or an) accountant. Period. The scope and, therefore, eventual cost of professional advice can be worked out in due course, but it is seldom worthwhile to go it alone or engage professional advisors too late in the process after the blueprint for sale has been determined. Many of the items discussed below are best considered and/or implemented with the assistance of professionals experienced with working through the legal and tax consequences of buying and selling a BC business and who are qualified to provide the advice you are seeking. That small investment will almost certainly save you time and money sufficient to justify any expense.
2. Do your “vendor” due diligence. While purchaser-side due diligence is an absolute must (and any party selling a business should anticipate and prepare for some form of it – see here for more information), any individual or group selling a business is strongly advised to undertake its own due diligence on any potential purchaser’s background and that purchaser’s source of funds. Is the purchaser an existing or potential future competitor (perhaps simply seeking a review of your financial statements to discover strengths and weaknesses of your business)? Does the purchaser have a history of successful or failed acquisitions or litigation related to past acquisitions? Does the purchaser have sufficient purchase funds available, or will any acquisition likely be subject to financing? The extent and formality of any due diligence can be flexible to suit the business and seller’s circumstances and can range from:
detailed conversations with the purchaser (take notes and insert any important statements as representations in any purchase agreement);
internet and social media searches of the purchaser and/or the purchaser’s principals; and/or
formal reviews of banking statements and interviews with third parties or references.
Every British Columbia vendor of a business should be aware of, and seek to avoid, the unfortunate experience and outcome suffered by the Frederique and Sinclair Philip (see SHH Management Limited v. Philip, 2020 BCSC 1411).
3. Obtain a Confidentiality or Non-Disclosure Agreement. A regular step in any mid-market or large M&A transaction, the utility of a good NDA is not diminished by the size of any potential transaction. We have raised this document before here. But seller beware - often you see an eager selling party, perhaps inexperienced, desperate to save transaction costs and looking to not rock the boat at the negotiation stage. When confronted with the idea of entering into a non-disclosure agreement the purchaser is more than happy to provide one that the “purchaser has used before”. Is this a good idea? Perhaps not. While in certain circumstances there is indeed reasons why a purchaser may also want confidential treatment of details of the transaction, it is overwhelmingly the case that a seller party is motivated to seek confidential treatment of almost all details of the transaction since it is the seller's business, customers, suppliers, employees and financial history, that is the subject matter of the proposed transaction. It is, therefore, prudent that the selling party either deliver-up a form of agreement appropriate to the selling party’s interests or ensure a careful review and revision to ensure any agreement offered by the purchaser obtains the same purpose.
4. Do not commit too early to structure or price. Most small to mid-market business purchase and sale transactions fall into two general structures – the acquisition of the assets (and perhaps assumption of certain liabilities) of the business or the acquisition of the owner’s interest in the business (usually the acquisition of the outstanding shares of the holding or operating company which runs the business). Generally, but not always, the former is preferred by the purchaser and the latter by the seller. To be sure, while either option may technically result in the eventual acquisition of a business, they are very different structures with very different implications on both purchaser and seller. Do not give up on a structure that may work better for you or accept a structure that may have material implications to you as a seller simply because the other party offers one structure or the other. Also, price and payment terms are, obviously, details worthy of detailed consideration. Do not be fooled by a higher potential price than was anticipated premised on a longer payment term or other conditions like performance or profitability. Keep these considerations open for as long as possible and, most importantly, conclude any agreement on either or both subject to consultation with your legal and accounting advisors.
5. Record your intent – carefully. If moving forward, a well thought-out and drafted term sheet or letter of intent is well worth the time and nominal expense. This document has also been considered in substantial detail previously (see here). It is, simply put, a money saver in the end. Too often Endeavor Law may be engaged to document a proposed deal based on verbal instruction or perhaps an exchange of emails. Revised terms no doubt follow as issues arise or, perhaps, earlier communications were not as clear as all parties originally thought leading to disagreements, delays and distrust … not to mention wasted time, effort and fees. A letter of intent does not have to deal with all things but it certainly can be a summation of conversations to a particular point in time; a roadmap for subsequent steps in getting to a final binding agreement and a methodology for dealing with issues, known and unknown, that may eventually arise.
Attending to the above items with the help of an experienced legal and accounting advisor can greatly increase the probability of a successful sale of your business and decrease the potential for false starts, less than optimal outcomes or failed deals. None of the above need require unusual or extraordinary time and expense but all, if properly considered and attended to, are likely to significantly mitigate the time an expense to both buyer and seller when and if the final documentation and closing of a business purchase and sale process is pursued.
Endeavor Law can assist those negotiating a potential purchase and sale of a business undertaking and, of course, provides legal advice and services related to any business purchase and sale process. Endeavor Law will always seek to provide competitive pricing for any legal services requested and is pleased to discuss fee arrangements that suit any potential client.
Does not constitute legal or other advice and must not be used as a substitute for legal advice from a qualified legal professional in your jurisdiction who has been fully informed of your specific circumstances. Information may not be up-dated subsequent to its initial publication and may therefore be out of date at the time it is read or viewed. Always consult a qualified legal professional in your jurisdiction.