Preparing a Business for Sale Or What to Look for When Buying a Business

So, the time has come to think about selling your business. The financials are looking crisp and there are opportunities outside the business that are attracting your attention. In our experience, there are certain steps you can take that will dramatically increase the saleability and marketability of your business. We have seen many worthwhile businesses fail to sell when purchasers were turned away by the state of affairs. As in selling a house, where the structure may be sound, the sale price will drop dramatically if the paint is peeling and the doors are squeaky. These may be cosmetic matters, however, they will have a disproportionate negative impact on the sale price. Similarly, the sale price of a business will be negatively impacted where the owner fails to look after the basics.

Also, the time and expense involved in completing the sale can increase by leaps and bounds where there are many loose ends that must be cleaned up prior to completion of the sale. Entrepreneurs often ask us for a quote on the legal fees on a business purchase or sale. Our experience is that they can vary by a factor of three or four depending on the level of our involvement. You have the ability to reduce your legal and accounting costs by looking after the issues listed in this article.

Do yourself a favour and prepare your business for sale.

If you are looking at buying a business, the financial statements only tell part of the story. A solid set of financials with many hidden legal, accounting or procedural defects is simply not a smart purchase. Review all the items in this checklist to determine whether the business you are reviewing is a suitable purchase.

Legal

• Is the corporate minute book up to date?
• Do you even have a corporate minute book?
• Are all the corporate annual returns filed?
• If you are extra-provincially registered, are all extra-provincial returns filed?
• Do you have a Unanimous Shareholders Agreement (USA)? Is the USA current and is it signed by all shareholders? Does the USA require an annual valuation, and if so, when was the last one completed? Does the USA contain any rights-of-first-refusal, piggy back, or drag-along rights provisions that must be addressed before a sale can be completed?
• Clean up all loose items with shareholders. For example, a shareholder who left the company many years ago and the share certificates have never been cancelled.
• Conduct searches at Personal Property Registry to determine if there are any expired security agreements that require a discharge.
• Are all your licenses and operating authorities current and are they transferable?
• Is your WCB current?
• Are there any outstanding government work orders or directives?
• Is there any unresolved litigation that may impact the sale?

Accounting

• Are your year-end financials current and accountant-prepared?
• Are your monthly internal financials current?
• Do you have the ability to easily separate owner-type of expenses from other expenses?
• Is there any money owing to Canada Revenue Agency (CRA)?
• Are your accounts receivable current or is it time to do some write-offs?
• Can you separate tangible asset value from goodwill?
• Have you consulted with your tax advisor on the tax consequences on the various sale scenarios?

Operations

• Do you have documented systems in place for the operation of your business?
• Do you have an operations manual?
• Do you have a current listing of all assets?
• Do you have a current listing of inventory or is there outdated inventory that should be purged?
• Is the ownership of all assets properly documented? For example, in many businesses some assets will be owned by the shareholders personally rather than the corporation.
• Do you have contracts in place with suppliers and if so are those contacts easily assigned to a new owner?
• Do you have current credit agreements with all your customers?
• Do you have any written contracts with customers?
• Are there any contracts that cannot be terminated on less than 6 months notice?
• Do you have documented and replicable marketing plan or is the entire marketing of the business dependent on you?

Human Resources

• Do you have an Employee Policy Manual?
• Do you have a current Employment Contract for each employee?
• Are the personal employment files for each employee up to date?
• Do you have a current listing of seniority and accrued holidays and sick days?
• Is there any accrued but unpaid overtime?
• Have you assessed the potential severance obligations on closing?
• Are there any existing labour disputes?
• Do you have benefits and how will the sale impact the benefits for both the employees and you?
• To what extent are your employees aware of the sale?

Intellectual Property

• Are all trade names and trade marks properly registered?
• Is your domain name registered and current?
• Is your website up to date?
• Who is the registered owner of all your intellectual property?
• Do you have proof that all your e-mail lists are compliant with Canadian Anti-Spam Legislation?
• Is all the software throughout your business properly licensed?
• Do you have a comprehensive strategy for backing up all your data?

Premises

• If you are leasing your premises what are the terms?
• What is required to assign the Lease to a new owner if the business is sold?
• Do you require the consent of the landlord if you are selling the shares in the company?
• If you own the premises where the business operates, who owns it? If the operating business also owns the premises, you may consider separating the ownership so that the premises are owned by a separate corporation.
• Are all zoning and business permit requirements in place?

Post-Closing

• What is your ultimate exit strategy and how does that impact what you do now to prepare the business for sale?
• Will you agree to a non-competition and non-solicitation term in the sale documents? If yes, for what territory and what length of time?
• Will you agree to stay on after closing for training and transition purposes?
• Will you consider a consulting agreement or contract as part of the closing arrangements?
• Are you willing to consider a reduction on the sale price if accounts receivable are not collected within a defined time period after closing?
• Will you consider a bonus payment if you can assist the buyer in achieving certain sales after closing?

Following the checklist we have just provided will ensure that your business is in optimal condition for sale. There will also be some added benefits.

For starters, you will have gained a better understanding of the health and status of your business. During the course of completing the items on this checklist you will likely discover gaps that can be corrected and efficiencies that can increase your profitability.

If Canada Revenue Agency ever walks through the door to perform an audit, having all these items in place will place your business on a much more solid footing. For example, we know of businesses that have had expensive issues to deal with when their minute books are outdated or either shares have never been properly issued or minutes declaring dividends have never been completed.

At Galbraith Law, we have been helping our clients sell or purchase a business for over 35 years. If you have any questions or concerns on how the above items impact your business or the business you are looking at potentially purchasing, please contact us. It would be our pleasure to assist you.