Buy/Sell a Business links:
About the law
Buy/Sell a business
by Jeffrey S. Lowe
The contract should clearly describe who is buying what from whom
at what price and when. It explains whether the sale is of assets or
of shares. The assets or the types of shares to be purchased are
described in detail.
Allocation of the Purchase Price
In an asset purchase, the purchase price is usually divided among the assets, lands, buildings, leasehold and machinery, inventories and receivables, intangible property and important contracts, and goodwill. These valuations are important as they have tax consequences.
In a share purchase, the purchase price is usually for the shares
of the company. Sometimes, a refundable deposit is paid at the
signing of the option, the majority of the price is paid on the
completion date, and a holdback amount is paid at a time after the
completion date. The holdback is a portion of the price which is
"held back" by the buyer from the seller to make sure that
the seller has done all that he promised to do.
Representations and Warranties
Representations and warranties are the promises and obligations of each party in the sale of the business. The buyer promises to do certain things and the seller promises to do certain things. These promises will be specific to each individual sale. Some examples of common promises by the seller are:
He owns the assets or shares to be
sold and has the right to sell
Some common promises made by the buyer are:
(a) She will pay the purchase price.
The buyer may want the seller to terminate all employees of the
business before closing. This protects the buyer from any claims
that the employees might have against the seller (i.e. unpaid
overtime etc.) in the past. If the buyer wants to keep the
employees, the seller should agree to help the buyer in getting the
employees to start new employment with the buyer after she buys the
An important part of any contract of purchase and sale are the conditions precedent, or the "subject to" clauses. Conditions precedent are things that must happen before the buyer or seller has to complete the sale. These conditions are unique to each sale.
Common conditions precedent are the buyer obtaining a bank loan,
the buyer being satisfied with a final inspection of the business,
the satisfactory completion of searches and search results, or the
landlord consenting to an assignment of the lease. Conditions
precedent allow the parties to cancel the sale without penalty if
something important happens or does not happen.
There are tax consequences of any sale of a
business. If the seller is not resident in Canada, the buyer may
have to withhold some of the purchase price to pay taxes. The buyer
should ask the seller to provide a guarantee as to his Canadian
citizenship. In an asset sale, taxes must be paid. In certain
instances, a share sale may trigger a capital gains exemption.
Schedules list additional information
regarding the sale. They are usually attached to the contract of
purchase and sale, and form part of the contract. They may include a
list of the inventory, any material contracts, the financial
statements, and other relevant information.
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This page last updated: September 22, 1999
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