When buying a business, is the new owner liable for any outstanding liabilities??

QUESTION:

When buying a business, is the new owner liable for any outstanding liabilities such as debt and lawsuits from the previous owner?

ANSWER:

Acquisitions are very common today: one business - usually a corporation - takes over or buys out another business and takes its place in the market. An acquisition is when one business, usually called the "successor," buys either another company's stock or assets.

Asset Purchase

Generally, in an asset purchase, the buyer-company is not liable for the seller-company's debts and liabilities. However, there are exceptions, such as: when the buyer agrees to assume the debts or liabilities; that is, as the buyer, you could assume some or all of the seller's debts in exchange for a lower sales price.

The asset acquisition does not require the approval of the buyer's stockholders, but the seller's stockholders do have to approve the sale of all or most of the assets. Stockholders who oppose the sale usually have the right to the "appraisal value" of their stock, which is determined by an independent third party.

Stock Purchase

If you acquire a business through a stock purchase, that is, buying all or substantially all of the company's stock from its shareholders, your company "steps into the shoes" of the other company, and business continues as usual. The buyer takes on all of the seller's debts and obligations, whether they're known or unknown at the time of the sale.

A known liability might be a bank loan that is recorded in the company's books and records. An unknown liability might be money owed to employees or contractors that has not been properly recorded and has been overlooked by both the seller and the buyer. But, the most dangerous unknown liability often arises from the seller's pre-sale activities.

For example, if the seller had been making and selling paint for 15 years before the buyer acquired it through a stock purchase, the buyer can be liable for the injuries sustained by a painter who claims that the seller's paint contained toxic chemicals, even if the painter's injuries did not show up several years after the stock purchase.

A stock purchase requires stockholder approval, and stockholders have the right to oppose the sale and to have the value of their stock appraised by an independent party.

In both cases, it is highly recommended to contact a lawyer in order to define your best purchase option.   For more information on the above, call/email our Founder & CEO + Business Lawyer, Hugues Boisvert at hboisvert@hazlolaw.com or +1.613.747.2459 x 304

Business Owners: Why you MUST have a business lawyer on your side.

Legal issues for business owners and entrepreneurs.

 As a business owner, you may think that you don't need the additional cost of hiring a lawyer. That may be a big mistake. Read this document to understand why consulting a lawyer is essential for any small business start-up. Lawyers are trained to interpret the law and those who specialize in business law can be worth their weight in gold. It is less expensive to retain a lawyer up front and have your legal work done properly than trying to hire a lawyer later on to fix problems that may have arisen from lack of legal knowledge. Sometimes procedures and forms for businesses look simple, but legal transactions are often more complex than they seem.

When do you need a lawyer? There are a number of situations where you should strongly consider consulting a lawyer.

Business Structure

One of the first things you will need to do is to decide on the business structure that best suits your needs. Your options can range from sole proprietorship, partnerships, limited or incorporated companies to co-operatives. A lawyer can help you choose the correct form of business structure, based on factors such as the number of people involved, the type of business, tax issues, liability concerns and financial requirements of the firm. Your lawyer can also help you draw up the necessary legal documents that set out the terms of any partnership or other shared ownership, ensure that all parties will be treated fairly and that there is a mechanism for handling any disputes or disagreements. Forms of business organization Find out which type of business structure is right for your business. Buying an existing business If you wish to buy an existing business, you may have to decide whether to buy only the assets of the business or, in the case of an incorporated company, the shares of that company. With any business purchase, you should have a buy and sell agreement, signed by both parties, that spells out the demands and obligations of each, as well as the terms of the agreement (for example, non-competition provision). Buying a business What you need to know before purchasing an existing business. Leasing Requirements Most small businesses will start by taking out a lease for their business premises. However, leases can be one of your largest expenses. Make sure that your lease will be suitable to your business needs, in case you wish to break your lease or expand your business.

A lawyer can give you advice on any pitfalls or costs that may be incurred, before you sign on the dotted line. Choosing and setting up a location Trying to decide where to locate your business and how to arrange it once you get there? Review the following resources and consider your options.

Contracts

When you are drawing up legal contracts, you should get the advice of a lawyer.  Some examples of contracts that you should get a lawyer's help with include:

•Licensing agreements

•Franchise agreements

•Employment contracts

•Subcontractor agreements

•Partnership, incorporation or shareholder agreements

•Lease agreements

•Mortgage, purchase agreements

This is not a comprehensive list. Above all, make sure you contact a lawyer before you sign any contract. Equity Financing If you plan to seek equity financing for your business, it is important to contact a lawyer to help you draw up the terms of the shareholder agreement and/or to review the legal documents provided by a potential investor. Your lawyer can also help you assess the impact of any new shareholder agreement on other obligations and existing contracts with employees, suppliers or financial institutions. Steps to Growth Capital Learn how to develop the plan, the materials and the confidence to go after the equity financing for your business opportunity. Other issues requiring legal advice

There may be other issues where you need to seek the advice of a lawyer in order to determine the best course of action.

 This can include:

 •Environmental complaints or concerns

•Employee problems or conflicts 

•Disagreements between business partners

•Closing your business

 •Protection of intellectual property

 Any time you are unsure of the legality of something or the legality of your business practices are questioned, you should be sure to get the advice of a lawyer. How should you choose a lawyer? If you have used a lawyer before for a real estate transaction or other personal issue, he/she may be able to refer you to a lawyer who specializes in small business start-ups or to a business lawyer. Ask your business associates, friends and family for references of law firms they have used and received satisfactory services from in the past. Make sure you have a comfort level with your lawyer, as you will be working closely for the life cycle of your business. Don't hire the first lawyer you speak to.

You will have to do some searching for the best expertise you need for your business. Make a list of potential lawyers you wish to meet. Many lawyers will meet you free of charge for the first time to establish expectations on both sides, as long as you don't try to get free legal advice while you are there. You will probably want to have a general business lawyer to handle your day-to-day affairs, but look for someone connected to specialists in specific areas of law who can refer you, as necessary, to someone with more expertise in areas like intellectual property, equity financing, and so on. Make sure you understand your lawyer's billing practices. If you think it may be a little while before revenue comes in to your business, you will have to make arrangements ahead of time with your lawyer, so you are both on the same page.

 For more information, call and/or email our Founder & Ceo and Business Lawyer, Hugues Boisvert at hboisvert@hazlolaw.com or +1.613.747.2459 x 304

Transition planning: what you need to know

Everyone who operates a company will eventually reach a point when they will have to leave the business because of age or health concerns. This could mean retirement, sale or simply winding up the firm and closing it down.

Collectively these are known as exit strategies, and every business owner should have one. Yet many will exit their companies without a clear plan. This may be largely due to the fact that entrepreneurs are more focused on starting and building their businesses than on leaving them.

The result? When business owners are ready to pass the torch, they may not get the full value of their company if they're selling to outside interests. Or if it's a family transfer, they could end up leaving family members with unmanageable problems instead of the inheritance they had hoped to bestow.

You can always make better business decisions by planning ahead. If you start to think about succession planning early, you can take a more objective look at your future needs and avoid last-minute decisions. Although unique to every business, a succession plan consists of a series of basic steps, such as setting your financial goals, determining legal requirements and establishing your objectives with your family or successor. It is often a complex and sometimes emotional process for a business owner.

"One of the most important steps is first knowing all the options available to you for exiting," says Calvin Hughes, a BDC consultant. "It's important that you feel active and engaged in the process. But at the same time, you have to accept that you're letting go of your business."

Here are some of the most common exit strategies used today.

Family transfer

If transferring your business to a family member is a possibility, it's key to ensure that your family is fully aware that you're planning a succession and to give them clear time parameters. A part of this, says Hughes, is ensuring that family members get a chance to voice their concerns and interest in the business. One of the most obvious advantages of opting for a family transfer as an exit strategy is that your family will benefit from your business legacy. As well, family members who are already involved in your business may require less coaching or involvement.

Management buyout (MBO)

The purchase of a company by its management team has several advantages for entrepreneurs. It can ensure uninterrupted continuity because the new owners already have invaluable experience with the company. For this reason, your company is more likely to keep its existing clients and business partners.

Selling to outside interests

Selling a business to outside interests is the most popular exit strategy because it's typically "more definitive and involves fewer variables than a family succession," says Hughes. Entrepreneurs should appreciate that the price they receive for their company might be more or less than the appraised market value. "While many business owners tend to overestimate the pricing of their businesses, a surprising number may underestimate it. For example, if your company becomes part of a much larger venture, then the value may go up accordingly," he says. A large corporation that is buying out a business, for instance, may be able to do more than you have with your business and therefore willing to pay a higher price.

Getting the full value for your business

Whether you're passing the company to a family member or selling it to outside interests, keep in mind that you will need a business valuation that establishes a realistic and fair dollar figure for your business. "Putting that dollar value on a business takes time, and you need to have a specialist who can look at your assets, liabilities and goodwill with an objective viewpoint," says Hughes, adding that he has seen too many cases of entrepreneurs who got caught at the last minute and weren't able to get the full value they had envisioned.

For entrepreneurs who choose selling as an exit strategy, Hughes feels they should also be aware that buyers are increasingly more sophisticated and demonstrate more business savvy. "Smart buyers will certainly delve more into your business history. So in turn, you have to anticipate this and be sure that you're armed with the right figures and backup material to get the value that you're looking for. You don't want to find yourself in a vulnerable position," he stresses. Company owners should keep in mind that the value of a business is not just based on financial statements. "The number of customers you have, for example, could also be a determining factor," he says.

Planning ahead

"Planning ahead, at least 18 months to 2 years, helps entrepreneurs make better business decisions," he adds. The earlier you start, he believes, the more time you can take an objective look at your company and where it will be down the road. Succession planning takes time, Hughes stresses, because of many complex issues such as business valuations, tax implications, family matters and coaching successors.

One of the first steps in good planning is to get a lawyer involved at least 12 months in advance. Getting legal help as early as possible in the process can help you avoid frustrations down the road such as delays, extra expenses and ultimately a deal that doesn't meet your expectations.

For more information on the above, please contact HazloLaw Founder & Business Lawyer, Hugues Boisvert at 613-747-2459 x 304 or at hboisvert@hazlolaw.com

You made an acquisition. Now what?

Acquiring a business is a huge step in the life of an entrepreneur. On top of managing your existing company, you now need to integrate a new one, while ensuring that both businesses operate without disruptions.

The first months after the acquisition are crucial for the successful integration of the new business, says BDC Consulting Partner Gail Blanchette. “You need an action-plan to avoid missing on essential steps,” says Blanchette, who advises business owners in Winnipeg.

She offered a must-do list during the first few months after an acquisition.

1. Meet your new people

A change of ownership is a nervous time for employees. That’s why communication is critical. As soon as possible, hold a group meeting with all of your new employees. If your company operates in multiple locations, consider a virtual meeting, through video-call or web-conferencing. “People need to hear the same thing together so that the message doesn’t get misinterpreted around the company,” Blanchette says.

In the mind of many employees, mergers and acquisitions translate into layoffs. Use this first meeting as an opportunity to put people at ease and reduce their fears. Talk about who you are and what your vision is for the business. But don’t promise more than you can deliver.

2. Introduce yourself to customers and suppliers

A change in ownership might be seen by competitors as a sign of weakness, Blanchette says. That’s why she advises entrepreneurs to think carefully about how they want to introduce themselves to customers and suppliers.

In some industries, it really doesn’t matter who owns the business, as long as it’s business as usual, she says. However, if you’re planning changes or will be interacting regularly with key customers and suppliers, you should make sure to call and meet them as soon as possible.

In an ideal situation, the previous owner will help smooth the way during the transition period by introducing you to external partners.

3. Seek to understand the business

No matter how well you’ve done your homework and due diligence before the acquisition, you won’t fully understand how a company works until you actually run it. Blanchette recommends that you perform a high-level, non-invasive examination of the business, using a specialized consultant or even your accountant to help you.

Look to broaden your knowledge by answering some basic questions, including: Are things operating as efficiently as you thought they were? Is the company achieving the financial results you thought? If not, what can you do about it?

While Blanchette recommends that you avoid major changes in the early stages, there may be pressing issues you need to address quickly. Blanchette gives the example of an entrepreneur who—three weeks after having purchased a business—had to decide whether to renew a $100,000 advertising contract. “This is one of those moments when your high-level analysis of the business will help you make a better informed decision.”

4. Focus on your strategy for the business

When buying an established business, you are also buying the previous owner’s way of doing things. “It doesn’t necessarily mean it’s the right or the best way of doing things just because someone did it that way for 50 years,” Blanchette says.

Consider how you want to run your new business and then build an action plan. As well, start working on a two-year, month-to-month cash flow forecast with the new expenses built in, such as loan payments for buying the business, increased salary levels and the cost of what you plan to change.

5. Leave your door open

Ultimately, buying a new business and integrating it with your existing one is a complex exercise in change management. Don’t be surprised if people still have questions after a few months or are resisting change. Your best ally to fight uncertainty and win people’s trust is to communicate often and ensure you’re being transparent, open and approachable.
 
For more information on the above, please contact HazloLaw Founder & Business Lawyer, Hugues Boisvert at 613-747-2459 x 304 or at hboisvert@hazlolaw.com

Transition planning: What you need to know

Everyone who operates a company will eventually reach a point when they will have to leave the business because of age or health concerns. This could mean retirement, sale or simply winding up the firm and closing it down.

Collectively these are known as exit strategies, and every business owner should have one. Yet many will exit their companies without a clear plan. This may be largely due to the fact that entrepreneurs are more focused on starting and building their businesses than on leaving them.

The result? When business owners are ready to pass the torch, they may not get the full value of their company if they're selling to outside interests. Or if it's a family transfer, they could end up leaving family members with unmanageable problems instead of the inheritance they had hoped to bestow.

You can always make better business decisions by planning ahead. If you start to think about succession planning early, you can take a more objective look at your future needs and avoid last-minute decisions. Although unique to every business, a succession plan consists of a series of basic steps, such as setting your financial goals, determining legal requirements and establishing your objectives with your family or successor. It is often a complex and sometimes emotional process for a business owner.

"One of the most important steps is first knowing all the options available to you for exiting," says Calvin Hughes, a BDC consultant. "It's important that you feel active and engaged in the process. But at the same time, you have to accept that you're letting go of your business."
Here are some of the most common exit strategies used today.

Family transfer
If transferring your business to a family member is a possibility, it's key to ensure that your family is fully aware that you're planning a succession and to give them clear time parameters. A part of this, says Hughes, is ensuring that family members get a chance to voice their concerns and interest in the business. One of the most obvious advantages of opting for a family transfer as an exit strategy is that your family will benefit from your business legacy. As well, family members who are already involved in your business may require less coaching or involvement.

Management buyout (MBO)
The purchase of a company by its management team has several advantages for entrepreneurs. It can ensure uninterrupted continuity because the new owners already have invaluable experience with the company. For this reason, your company is more likely to keep its existing clients and business partners.

Selling to outside interests
Selling a business to outside interests is the most popular exit strategy because it's typically "more definitive and involves fewer variables than a family succession," says Hughes. Entrepreneurs should appreciate that the price they receive for their company might be more or less than the appraised market value. "While many business owners tend to overestimate the pricing of their businesses, a surprising number may underestimate it. For example, if your company becomes part of a much larger venture, then the value may go up accordingly," he says. A large corporation that is buying out a business, for instance, may be able to do more than you have with your business and therefore willing to pay a higher price.

Getting the full value for your business
Whether you're passing the company to a family member or selling it to outside interests, keep in mind that you will need a business valuation that establishes a realistic and fair dollar figure for your business. "Putting that dollar value on a business takes time, and you need to have a specialist who can look at your assets, liabilities and goodwill with an objective viewpoint," says Hughes, adding that he has seen too many cases of entrepreneurs who got caught at the last minute and weren't able to get the full value they had envisioned.

For entrepreneurs who choose selling as an exit strategy, Hughes feels they should also be aware that buyers are increasingly more sophisticated and demonstrate more business savvy. "Smart buyers will certainly delve more into your business history. So in turn, you have to anticipate this and be sure that you're armed with the right figures and backup material to get the value that you're looking for. You don't want to find yourself in a vulnerable position," he stresses. Company owners should keep in mind that the value of a business is not just based on financial statements. "The number of customers you have, for example, could also be a determining factor," he says.

Planning ahead
"Planning ahead, at least 18 months to 2 years, helps entrepreneurs make better business decisions," he adds. The earlier you start, he believes, the more time you can take an objective look at your company and where it will be down the road. Succession planning takes time, Hughes stresses, because of many complex issues such as business valuations, tax implications, family matters and coaching successors.

One of the first steps in good planning is to get a lawyer involved at least 12 months in advance. Getting legal help as early as possible in the process can help you avoid frustrations down the road such as delays, extra expenses and ultimately a deal that doesn't meet your expectations.