Life is all about risk. There is risk when driving to work, when crossing the street and when you arrive late for your anniversary dinner. There is also risk when you decide to buy or sell a business. Legal counsel can help identify and mitigate the risks associated with buying or selling your business; however, you’re on your own if you’re late for your anniversary dinner!
When buying a business there are a lot of factors that a purchaser will consider. These include purchase price, timing, confidentiality, deal structure (i.e. share or asset purchase) and generally, how to optimize the profitability of the business post-acquisition. With so many factors to consider, it is not surprising that purchasers often overlook certain legal risks associated with the acquisition.
For example, if the purchaser is buying the shares of a company that owns the business, the purchaser generally acquires all of the liabilities of the company as well. Such liabilities may include unpaid tax liabilities, pending litigation including major product warranty claims, environmental contamination, intellectual property infringement claims, employment standards and workers compensation concerns and other significant legal risks.
To identify and reduce such risks, legal counsel can provide a wide range of due diligence searches. These searches provide a purchaser with detailed information about various liabilities that the business may face. Once the risks are identified, the purchaser can negotiate a variation to the purchase price or require the vendor to provide representations, warranties and indemnities to compensate for the risks.
Many businesses rely heavily on personal relationships built over time. In these instances, the purchaser may want to retain the services of the vendor (or the vendor’s principal) to assist with business transition, customer relations and retention of key staff. Legal counsel can help the purchaser design a deal structure that provides the vendor with appropriate incentives and compensation while protecting the business and the purchaser going forward.
Selling a business also has its own share of risks. In most acquisitions, the purchaser typically requires the vendor to provide representations and warranties regarding the business, and provide assurances regarding the financial health of the business. However, there are several instances where it is appropriate for the vendor to limit or qualify the representations and warranties in order to limit its financial exposure after acquisition. For example, the vendor may wish to qualify that certain representations and warranties are made to its actual knowledge. Further, the vendor may attempt to limit the duration of its exposure to the purchaser after acquisition, and exclude liability for certain types of claims and damages. Legal counsel can help the vendor negotiate and draft appropriate limits on the vendor’s contractual and legal obligations to the purchaser during and post-acquisition.
In many deals the vendor is required to finance a portion of the purchase price, thus creating additional risk. To mitigate the risk of non-payment, there are several options that a vendor may consider including, registration of a security interest against the assets of the business, guarantees from the principal of the purchaser or its parent entity, placement of shares of the sold company into escrow as security and/or contractual rights that allow the vendor to monitor and/or participate in the management of the business to maximize the likelihood of repayment. Legal counsel can help the vendor with negotiation and documentation of one or more of these options.
Experienced legal counsel can assist purchasers and vendors with legal risks arising from the sale of a business. As for being late for your anniversary dinner, flowers are always a good place to start.