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4 Tips for Legally Purchasing a Business in Canada

by Olufisayo
Business Lawyer

Although buying a business is not as challenging as starting one from the ground up, it can become very messy if you don’t do it properly.

Time and money are the most significant factors that every entrepreneur needs to put in to keep their newly acquired business running, as well as growing. You might already be familiar with that, but what about the legal steps for purchasing an already running company?

You can go through four crucial tips that you need to follow through, no matter what happens. If you’re not familiar with these issues or don’t have the time, then hire a business lawyer to help you out with everything from due diligence to drawing up papers.

Research Your Desired Business

The first step might seem quite obvious, but you need to conduct due diligence on the business that you want to purchase. You need to find out exactly what their weaknesses and strengths are because it will help you figure out what you are exactly getting into.

For instance, you can’t buy a used car before taking a look at its engine or having a professional check it out thoroughly.

For starters, you must request that the other company gives:

  • Their financial documents.
  • A complete list of their buyers and suppliers.
  • A detailed list of all their assets, as well as equipment.
  • Copies of major and minor contracts that affect the business. This would include any leases.
  • A complete list of all their outstanding debts.

But the seller probably will not easily hand over everything related to their business. They will ask you to sign a non-disclosure agreement to make sure you don’t sell the information or use it to start your own company.

While that may seem reasonable, you should have a business lawyer take a look at the papers before you sign them. Otherwise, you could end up doing something you will regret.

Find Answers to Key Purchasing Questions

1.      Who Will Buy?

While this question may seem odd, you actually need to figure out precisely who is buying the business.

Many business are owned and operated by major private companies. That means everything, like the inventory, assets, and trademark, will be owned by the private company as well.

What you need to figure out is whether you are buying the company personally, or are you doing it through your own organization. Now you probably understand the question.

While a business lawyer can guide you the best, buying through your company might be a better option. This puts your personal assets and yourself out of risks. Also, you can have major tax benefits.

2.      What Will Be Bought?

This is an odd question as well, but it means you need to figure out if you are buying shares or assets.

A significant advantage of buying the assets of your desired company is that it can give you a better look into the assets and liabilities you will have purchased; rather than being in the unknown about any undisclosed liabilities. Also, it means that you will be in an agreement with the company that owns the business.

But buying the shares puts you in an agreement with the people or person who own the company. That means you will need to have established a certain level of trust with the seller. Also, if the business doesn’t go as planned, the seller might end up with zero assets.

That is why you need a business lawyer to help with these complicated matters.

3.      How And When Will The Amount Be Given To The Seller?

It’s improbable that you will decide one single value of the business and pay it on a particular date.

The business will very likely be up and running during the time of negotiations. That means money will be going in and out. Therefore, you should consider holding back a portion of the payment until you figure out whether or not all the provided information was accurate.

Also, you may want to consider paying the amount in installments. Giving a lump sum is not easy, which is why you can make quarterly or annual payments.

Go Through Negotiations on the Terms

You now understand the structure of purchasing the business, but the contract terms need to include much more than that.

While there isn’t much room for negotiations in the purchasing aspect, you must go through several talks and discuss the other terms.

For instance, you might want to negotiate on the number of employees you want to take on while purchasing the company.

The seller will usually insist that you take on all of the employees, and they might refuse to fire many of their workers before the purchase. However, you should take on the least number of employees in case things don’t properly work out. If you fire the employees after the purchase, then you will have to pay the severance packages yourself.

Also, the seller might take the offer to a competitor business in hopes that they might battle with you and make the transaction more in their favor. To avoid that, you can insist that they sign a non-competition agreement.

Draw Up the Legal Papers

Since the buyer is generally responsible for drawing up the paperwork, you must hire a competent business lawyer for this process. This paperwork can be extremely complicated, and might even look like a big book when it’s done.

But the first thing your lawyer will draw up is the letter of intent. It will outline all the aspects of the deal, which can help both parties properly understand what terms they are agreeing to in this purchase. This will also be useful to clear out any misunderstandings.

Your lawyer will also be responsible for drawing up many other documents essential for the purchase. All of them are necessary because they cover every little detail, leaving no room for any problems after the transaction goes through. That is why you should not move forward until every single part is appropriately covered in the right order.

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1 comment

4 Ways of Finding a Business for Sale Online July 3, 2020 - 8:51 PM

[…] Buying a business is the best option since all the legal work is already done for you. You don’t have to undergo all the hassle of figuring out your business model and monetization methods. This means that you can directly go to expanding the business and even making profits. […]

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