Legal advice beneficial in all stages of business sale
By AdvocateDaily.com Staff
The process of selling or transferring a company can be complex, lengthy and come with potential pitfalls — for sellers, bringing a business lawyer on board in the early stages can help ensure the business is properly structured for sale and their needs are being addressed during the negotiation process, says Vancouver corporate lawyer Jonathan Reilly.
As Reilly, founder of English Bay Law Corporation, tells AdvocateDaily.com, clients looking to exit their businesses realistically have three choices — to close, to sell or to transfer it to the next generation via an estate freeze.
“Once that decision is made, we can work with the individual’s financial adviser and accountant to appropriately structure the business from a legal standpoint to prepare for one of those three scenarios,” he says.
The best time to start the sale process, he says, is when the business owner is capable, the company is robust and has obvious value.
“I would say that when a business is still growing or, at the latest, when it plateaus. I would not wait until it starts to come off its peak,” says Reilly.
“Leaving it too late, either because the business moves into a phase where it’s less sellable, or too late because the owner dies, gets ill or is not capable of selling it— those are all risks,” he adds.
In terms of preparing a business for sale, says Reilly, seller due diligence includes cleaning up any issues in advance of the sale — ensuring there is enough time left on a lease, for example, or fixing cluttered or incomplete systems that may affect the value of the business.
Once the business is positioned for sale, a business lawyer will deal with the legal aspects of the sale or transfer, specifically, helping to ensure the contract addresses the seller’s needs and that they are aware of any pitfalls.
“I see transactions come across my desk where the seller has agreed to sell, and then they bring the sale agreement to the lawyer, and they’ve had no legal advice before signing it. I think the selling lawyer can bring a lot of helpful advice to the seller if they’re involved in that process earlier,” says Reilly.
For example, says Reilly, lawyers can take sellers through a two-step process, starting with the clients negotiating a letter of intent or memorandum of understanding that lays out the basic structure of the transaction, the price, the commitments of the buyer and seller, and how the handover is going to look.
“That letter can be binding or non-binding, but it contemplates being followed up by a formal legal agreement that goes into greater detail, more warranties and representations, protections for the buyer, and protections for the seller.”
A business lawyer can also help prepare the seller for issues that the buyer is likely to raise, says Reilly.
“They can educate the seller in terms of the actual proposal put on the table by the buyer. The lawyer can explain to the seller if there are pitfalls in it for the seller, where the buyer has saddled liabilities on the seller that may go on for a period of years and whether that is normal or just what the extent of those liabilities are, so that the seller can make an informed decision about whether or not to accept them,” he says.
Other advantages that the lawyer brings to the seller’s team, says Reilly, is to work with the buyer’s lawyer on creative solutions to move past any sticking points that may come up during the negotiation process.
In addition, says Reilly, “Sometimes, the seller just needs a strong person in their corner who can say no, so that the seller can have a positive relationship with the buyer. And that’s actually very important in the course of the negotiation, and it may be vital if there is an ongoing relationship after the sale.”
Finally, the seller’s lawyer will implement the terms of the contract from a legal standpoint, ensuring that all steps are taken to properly transfer the company.
Ultimately, says Reilly, it is essential to remember that a business sale not only carries a number of legal concerns but also financial and personal issues, which is why a team approach is often best.
“The team would consist of a family financial adviser, a certified professional accountant, a lawyer and if the decision is made to sell the business, then a licensed business broker — that would be the ideal.”