What You Should Know Before Selling Your Business in Canada

Deciding to sell your business can be one of the toughest choices a business owner or entrepreneur faces. Building a successful business requires immense dedication, countless hours, and significant investment. It’s understandable that many business owners either avoid thinking about selling or fail to prepare for a potential exit when it comes time that they are ready to do so.

When you have made the decision or if you are thinking about selling a business know that it can be both exciting and complex, with the potential to be a life-changing event offering significant financial benefits. However, it requires careful planning and preparation, with the help of an expert legal and financial team by your side, to maximize its market value. 

Why Might You Want To Sell Your Business?

There are numerous reasons why an owner might decide to sell, such as downsizing, upsizing, expansion, or retirement. Even if you don’t plan to sell your business in the near future, it’s crucial to evaluate its worth and prepare for an eventual exit or to consider passing it on to a family member or dividing your shares into the hands of other partners depending on the structure you’ve built.

Whatever the reason might be, beyond reviewing and drafting the sale agreement and necessary documents, it’s essential to engage a corporate lawyer early on to review the Letter of Intent (LOI), draft an NDA, and guide you through the sales process. A financial, or business, advisor is also an important member of the selling team, whether you’re employing your company’s CFO or accountant, or hiring an independent expert.

Be Sure To Plan Ahead And Be Organized Now and When Selling

Selling a business is a time-consuming process that involves significant paperwork and financial investment from both parties to ensure that each side gets what they expect. For instance, before finalizing the transaction, the buyer will typically conduct thorough due diligence to verify the details of your business and the obligations they will inherit. This process may include assessing any contingent liabilities and litigation risks associated with your business.

As a seller, it is crucial to ensure that your corporate records, files, contracts, and books are meticulously organized to avoid raising any red flags during the buyer’s due diligence. To set yourself up for success from the start, create filing systems, document how you do things, and who takes care of what so that as your business grows you’ve got a solid paper trail outlining how you got there. But, if you are looking to sell and have never really organized your business as mentioned, start as soon as possible because it will only work to your benefit later on. Why? Because any issues, such as gaps in financial records or unfavourable contracts, can deter potential buyers and diminish the value of your business, making it harder to attract suitable buyers.

Keep Things Confidential

It’s important to protect the confidentiality of your business from the outset. During the buyer’s thorough due diligence process, they will inevitably encounter potential trade secrets, material contracts, and other important information. A carefully drafted non-disclosure agreement (NDA), prepared by your business lawyer, will prevent the buyer from using any confidential information acquired during due diligence to approach your client base or use it in their own business if the deal falls through.

How Do You Establish A Fair Price For Your Business?

In most negotiations, the primary focus will be on the business valuation and sale price. For privately held Canadian corporations, accurately evaluating the business can be particularly challenging, as these companies are not publicly traded and lack the same level of public scrutiny and comparability to competitors.

The best approach to set the price of your business when selling is to have an appraisal done by a professional commercial appraisal company. They will give you a third-party opinion and business valuation so that you have an accurate fair market value to ask for as a starting point. 

You Have A Choice In Terms Of The Type Of Sale You Prefer

Selling a business involves more than simply handing over the keys. You must decide between an asset sale and a share sale. In an asset sale, the buyer selects specific assets, leaving the original company with its remaining liabilities. In a share sale, the buyer purchases some or all of the company’s share capital, assuming all liabilities. This requires thorough due diligence. A share sale offers the seller a “clean break” but may require more warranties and indemnities to reassure the buyer. If you prefer a specific method over the other, let your commercial lawyer know so that they can help you strategically negotiate towards that option.

Additionally, several other elements can be negotiated between the buyer and seller, such as the specific terms of the purchase agreement, valuation, purchase price, non-competition clauses, and confidentiality considerations. Whatever you want to include, ensure that you have your lawyer review all the terms and clauses in the purchase negotiations ahead of signing on the dotted line so that you fully understand every implication of the sale transaction.

Prepare a Letter Of Intent With Your Lawyer

Once you and the buyer have a general understanding of the key terms and structure of the transaction, the buyer will prepare and submit a Letter of Intent (LOI) to formally express their interest in selling the business. An LOI is a brief document that outlines the intentions of both parties and the basic elements of the proposed transaction.

One of the biggest mistakes a seller can make is entering an LOI on terms that are not favourable as it can be difficult to re-negotiate these terms at a later time even though the LOI may be non-binding. Among other things, your lawyer will negotiate the representations and warranties in the sale agreement, consider post-closing adjustments to the purchase price and your obligations to the buyer and business post-closing.

Key items typically negotiated and included in an LOI are the list of assets or shares being purchased, the purchase price and payment method (such as a full cash buyout, bank loan, or monthly installments), the proposed closing date, the negotiation and investigation periods (commonly referred to as due diligence periods), exclusivity periods, assumptions or terminations of employees, and non-competition and non-solicitation agreements.

If You’re Preparing To Sell Your Business, Call Hukam Law

Selling your business is no small task and, as you can see, there are a number of items to be considered. No matter the size of the transaction, you need to identify advisors with the right experience and engage a business lawyer that can coordinate the transaction. At Hukam Law, we have the expertise to guide you through the complexities of selling your business.

Contact us at 📞 705-915-0884, or via email at info@hukamlaw.ca, and we’ll provide the assistance you need, right from the time you decide to sell. We’ll also answer all of your questions and advise you along the way so that your business negotiations are informed and legally advantageous. 

***The information provided in this blog is for general informational purposes only and should not be construed as legal advice. If you have legal questions, we strongly advise you to contact us.