Earn-outs, a contingent purchase price adjustment mechanism, are a common feature of private M&A transactions, especially where there is some uncertainty around valuation and future performance. For example, a motivated buyer enticed by future growth projections may be prepared to pay a higher multiple of earnings for a business than other prospective purchasers but, in exchange for doing so, may require that a portion of the purchase price be contingent on the business achieving those growth projections. If the seller believes the proposed growth targets are attainable and wishes to extract the higher pricing, it may be agreeable to an earn-out.
If you are thinking about selling your business in the near future, it’s a good time to consider the tax-planning strategies that may be available to help minimize the capital gains tax that will be payable on the sale. In a share sale, one of the most common strategies involves structuring the transaction so that the vendor can rely on the $800,000 lifetime capital gains exemption.
The thresholds for pre-merger review under the Investment Canada Act and pre-merger notification under the Competition Act will both be increased for 2015.
Everyone has heard of the damage that can done to a company through inappropriate use of social media, yet a company’s social media presence generally receives little to no attention when it comes to the purchase and sale of a business. Even though the goodwill associated with the business may be a major factor in the purchaser’s decision to buy it, the purchaser will rarely require more than a list of all passwords and login information and general representations and warranties related to intellectual property.
This is the first in a series of planned posts in which I will discuss in some detail the structure and components of the “typical” purchase and sale agreement for shares or assets of a private company.
The importance of the purchase and sale agreement cannot be overstated as it governs the entirety of the transaction and at the end of the day specifies, among other things, who is paying how much to whom for what and when and in which circumstances the price can be adjusted or “clawed back”. For this reason, it is critical for purchasers and sellers, whether it’s their first time or their hundredth time, to be thoroughly familiar with this document.
For many private business owners with strong annual earnings the ultimate retirement plan or exit strategy is to sell their business to a strategic buyer or private equity firm for a high multiple of earnings. It is not unusual for such business owners to think that once they achieve attractive EBITDA numbers for three to five years running, they are ready to go to market and achieve premium pricing.
In reality, good financial metrics are table stakes in the M&A game. Sophisticated buyers conduct comprehensive due diligence on all value drivers to assess the merit of a transaction and determine price. Some of those value drivers include commercial and operational synergies, growth potential, intellectual property, human capital, risk management and legal profile.
In a recent Legal Post Article Drew Hasselback prognosticates that representation and warranty (R&W) insurance “may pick up steam in Canada this year”. While R&W insurance has been around for more than 20 years, it has never gained significant traction in the context of M&A transactions in Canada. Is this about to change?
On January 15, 2015, further provisions under Canada’s Anti-Spam Law, commonly known as “CASL”, came into effect. These provisions prohibit the installation of computer programs, or sending of electronic messages from a computer system where a computer program has been installed, without express consent. More information can be found on these new provisions in an article I wrote for our Technology and IP Group. With these provisions coming in to effect, it is an opportune time to remind ourselves of the impact of CASL on M&A transactions.
On November 13, 2014, the Supreme Court of Canada updated Canadian common law by extending for the first time the principle of good faith to all contracts.
Previously, the duty of good faith existed only in employment and insurance contacts in Canada. The ruling now aligns Canadian common law with Civil Law in Quebec and the law in most U.S. jurisdictions. The Court expects its decision to bring certainty and coherence to this area of law.