Representations & Warranties – No One-Size-Fits All

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Private M&A purchase and sale agreements in Canada follow a very familiar pattern and typically include what can be described as the ‘usual representations and warranties’. In sophisticated purchase agreements the usual representations and warranties are comprehensive and cover everything from corporate, employment and environmental matters to financial, tax and intellectual property matters.  While the usual representations and warranties cast a wide net, they are by no means a one-size-fits all solution for addressing risk. Each transaction is unique and requires that clients, their financial advisors and their legal advisors turn their mind to drafting representations and warranties that address the specific risks of the transaction. Continue reading

When Shareholders Can’t Get Along (Part 2)

business04In my last blog post, I explained how the shotgun clause can be used to separate shareholders that are no longer getting along. The shotgun clause can be an effective way of avoiding litigation and providing a clean split between the warring parties.

How does the shotgun clause work? Generally speaking, it provides that one shareholder may make an offer to buy the other shareholder’s interest at a price set by the shareholder making the offer. However, the interesting twist is that having made the offer to buy, that shareholder is also deemed to have offered to sell their interest at the same price and on the same terms as the offer to buy. So it is left up to the shareholder receiving the offer to determine whether or not they want to sell their interest or buy the interest of the other shareholder. This has the effect of making the offering shareholder think carefully about the price. If they make a lowball offer, they may end up being bought out at that low price! Continue reading

When Shareholders Can’t Get Along

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Many privately owned businesses have more than one owner. This can be beneficial to a business, but it also poses its own problems. Sometimes one or more of the parties realizes that the partnership is not working which leads to dissention and conflict. What options are there for individuals facing this scenario? Continue reading

Business Succession – Learn from the Errors of Others (Part 2)

business02Whether a business is worth $1 million or $100 million, the same principles apply when it comes to business succession.   After many years of experience in private company succession (and with over a third of a billion dollars of transaction value behind me) I see business owners falling into the same predictable patterns time and time again.

It’s understandable because while business owners are skilled at business operations, they have little experience in succession planning. After all, most business owners will sell or transition out of a business only once. Let’s take a look at some more of the key lessons to be learned (see Part 1 here). Continue reading

Business Succession – Learn from the Errors of Others

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Whether a business is worth $1 million or $100 million, the same principles apply when it comes to business succession. After many years of experience in private company succession (and with over a third of a billion dollars of transaction value behind me) I see business owners falling into the same predictable patterns time and time again.

It’s understandable because while business owners are skilled at business operations, they have little experience in succession planning. After all, most business owners will sell or transition out of a business only once. Let’s take a look at some of the key lessons to be learned. Continue reading

The Staged Buyout

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When it comes to succession, some business owners prefer to pass the business on to their employees. Instinctively, they know that this can be a very risky way to transition the business. On the other hand, they like the idea of passing on the business to employees because these are the very people that helped to make the business a success. I assist many business owners with planning and executing tailored business succession strategies.  In particular, one method I have used successfully is what I call the staged buy-out process. In that process I consider three critical elements. First, the need for the business succession plan to create an alignment of interests between the owner of the business and the proposed successor. Second, the need for the business succession plan to set measurable milestones to ensure that the proposed successor has financial targets to meet that will generate the income needed to buy the owner’s interests in the business. Third, the need for the business succession plan to provide “escape hatches” that will allow the owner to unwind the buyout if things were not working out as planned. When these critical elements are present, the likelihood of a good result is increased. Continue reading

Buyer Beware: Employee Liabilities from a Business Purchase

A purchaser of a new business often keeps on existing employees who have the knowledge to help the buyer operate the business efficiently.  Purchasers are happy to pay and award these employees for their services since the purchase of the business; however, buyers often fail to realize that their obligations to employees may extend to periods prior to the acquisition.  This, unfortunately, can lead to headaches and financial liability, especially in cases where employees have been with the business for many years.  As a purchaser, you should be aware of Section 97 of the Employment Standards Act (the “ESA”) and its effects on the purchase transaction.   In particular, Section 97 of the ESA provides that:

[i]f all or part of a business or a substantial part of the entire assets of a business is disposed of, the employment of an employee of the business is deemed, for the purposes of this Act, to be continuous and uninterrupted by the disposition.

So, what exactly does continuous mean?  An employee who was working for the vendor at the time of acquisition will be deemed to be continuously employed and the buyer will assume the liabilities associated with that employee.  In contrast, if the employee is terminated by the vendor just prior to the closing date of the acquisition, then the employee will not be continuously employed and the vendor will assume the liabilities associated with that employee.

What liabilities are we talking about?  A prospective purchaser of a business should be aware of the consequences of Section 97 of the ESA listed below, which are not exhaustive.  Of course, if the employees of the business are terminated prior to the purchaser acquiring the business, the consequences do not materialize.

  1. Wages. The purchaser is responsible for all outstanding wages owed to an employee.
  2. Statutory Holidays. Employees are entitled to statutory holidays based on employment with both the vendor and the purchaser.
  3. Vacation Pay. Employees are entitled to vacation time and vacation pay as of their employment start date when the business was owned by the vendor. The purchaser assumes the liability for any accrued vacation pay owing to an employee if such pay has not been paid by the vendor.
  4. Benefit Plans. The benefit plans become a condition of employment with the purchaser and must be continued as a condition of employment.
  5. Employees on Leave. Employees on leave, whether paid or unpaid, are still considered employees of the business.
  6. Purchased Assets Subject to Lien. If any wages are owing to employees, the purchaser buys the assets with a lien attached to them.
  7. Severance and Notice.  The purchaser is responsible for ESA severance and notice obligations for employees to their original start date with the business and, in the absence of an enforceable employment agreement limiting severance and notice to the ESA minimums, for common law severance, which could be significant for long term employees.  Keep in mind that severance obligations only arise if an employee is terminated without cause.  Accordingly, a purchaser should factor in the cost of severance for any employees that it anticipates letting go of following the closing of the transaction.

The purchase and sale of a business is a complex process.  Purchasers should seek the help of qualified advisors who can help purchasers avoid surprises after they have taken over the business. Qualified advisors can assist in structuring the transaction so that the vendor is responsible for severance costs associated with the purchase of a business.

Donations of Private Company Shares

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Last week, the federal government released its 2015 budget. The budget contains a number of proposals to amend the Income Tax Act, and also provides updates regarding previously announced tax measures. One of the proposed changes announced in the budget will be especially relevant to business owners who are considering a future sale of their business.

Continue reading

The Standstill and Exclusivity Agreement

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When a business succession plan involves the sale of the business to a third party, the buyer is often concerned about staying out of a bidding war. Of course, the buyer wants to avoid a bidding war to ensure that the price is not bid up. Therefore, a buyer will often request the seller to enter into an exclusivity and standstill agreement, sometimes called a “no-shop” agreement. Clearly, if the seller is not subject to a standstill agreement, the buyer may find that there are other buyers in the wings and therefore there is more pressure to increase the price and close the deal quickly. This situation will favour the seller and the smart buyer will therefore ask the seller to sign a standstill agreement to ensure this does not happen. Continue reading

The NDA (or Confidentiality Agreement)

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If you are thinking about selling your business, you should be aware of the heightened need these days for protection of private information. I am constantly surprised by the amount of private information business owners are willing to supply to prospective purchasers of their business. Unsophisticated sellers often allow potential buyers access to highly confidential information, without ever considering that they may be giving up business secrets for free. As a seller, you should never allow anybody to access your confidential information without first having them sign a confidentiality agreement. Continue reading