When buying a business potential business owners are typically focused on the purchase price. However, it is equally important as buyer to thoroughly review all relevant corporate documents before the deal closes. Even if a buyer can get a “good deal” on the price of the business, not conducting a proper review could end up costing the buyer significantly.
There are two main ways to buy a business: a share or asset purchase. There are advantages and disadvantages to both, a review of which is beyond the scope of this article. Regardless of the structure, a buyer can submit a letter of intent after a few of the key terms have crystalized.
Once the letter of intent has been signed, the buyer will want to conduct a thorough review of the business with its legal and accounting advisors. It will want to review recent financial statements of the business, all material contracts, employee details, tax documents, and any other relevant corporate documents.
The buyer will require that the seller give certain representations and warranties about the business, and can relate to the due diligence materials provided by the seller. The representations and warranties are essentially statements of facts by the seller, relating to the condition of certain items, the payments of accounts, valid and subsisting contracts and leases, among many other items.
For example, the buyer will want to make sure that the financial statements provided are accurate, and up to date. The buyer will want to see a representation from the seller stating that the financial statements are a fair representation of the corporation’s assets and liabilities. If the buyer takes over the business and discovers the affairs to be different than those represented by the seller, the buyer will then have recourse against the seller for a breach of representation.
After closing, if issues are discovered by the buyer, then it will want to communicate its concerns to the seller quickly, clearly, and if necessary, persistently. If there are any ongoing payments from the buyer to the seller, through for example a promissory note with set-off entitlements, the buyer may want to invoke the set-off right and halt further payments until the issue is resolved. It is also prudent for the buyer to review limitation periods stated in the purchase agreement, since representations and warranties typically only survive closing for a limited period of time.
To reduce the chances of hidden liabilities, the buyer will want to conduct a thorough review of the seller’s corporate documents.
Conduct Law is an Ottawa based business law firm with locations in Ottawa, Barrhaven and Kanata. Our professionals are experienced business lawyers who can help with commercial real estate, liens, incorporations, trademarking or implementing corporate structures that manage tax obligations, whether as a corporation, partnership, family trust, testamentary trust, or any other type of legal entity.
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