Legal considerations when selling a business

You should always consider getting legal advice when contemplating the sale of your business, but when is the best time to engage legal counsel? The classic lawyer answer is ‘yesterday.’

“We like to be involved as early as possible. The earlier, the better,” says Michael McIsaac, BDO Law LLP’s National Leader, who specializes in mid-market private company transactions. “We help guide our clients throughout every stage of the deal process. We use our knowledge and experience to anticipate and act proactively in our clients’ best interests.”

Having a lawyer with considerable deal expertise is key, he notes. Similar to how a cardiologist is the best person to see for critical heart conditions, a lawyer who specializes in purchase and sale transactions and is familiar with the issues that often arise throughout the sale process can be both your best defence and offence.

Here's a general overview of the customary transaction documents you can expect to see throughout a purchase and sale process, as well as some general commentary as to the importance of legal due diligence:

Non-disclosure agreements

A non-disclosure agreement (NDA) is a critical first line of defence to protect your confidential, often proprietary, information. During the initial stages of a sale process, buyers will look for the opportunity to review every aspect of your business—from financial statements to supplier, customer, and employee information. 

While there isn’t a generally accepted standard form of NDA, it is important that you carefully consider the following inclusions:

• Use and disclosure—The NDA should state the purpose of the information’s usage and restrict its use for evaluating a potential transaction.     
• Non-solicitation provisions—It’s common to have a provision that prevents interested parties from stealing customers or recruiting employees, especially if that party is a competitor.
• Enforcement period—The NDA will be enforced for a certain amount of time and the length should be as long as possible. While this may vary by industry, an NDA will often be in place for 12 to 24 months.  

Letter of intent

A letter of intent (LOI) generally outlines the framework upon which the parties are willing to proceed to negotiate a definitive agreement. “It is important that the LOI clearly establish both binding and non-binding provisions,” says McIsaac. 

The binding provisions will usually include an exclusivity period that gives a potential buyer the ability to complete their due diligence without fear of a seller otherwise shopping the deal to other potential suitors. 

The non-binding provisions will usually include the proposed economic details of the underlying transaction, and whether the buyer intends on purchasing shares, assets, or a combination of both. There may also be information on the structure of the deal, including the purchase price and how it will be paid (such as in the form of a holdback or a post-closing earnout). 

Ultimately, a properly drafted LOI should benefit both sides, as it establishes a level of intent and understanding upon which the parties have agreed to continue their good faith negotiations. 

Legal due diligence 

Due diligence provides an opportunity to uncover and identify financial, legal and/or operational matters that may impact a business. “As a buyer, you need to be certain that you have a strong understanding of the business you are about to acquire,” McIsaac explains.

Purchase agreement

Ultimately, this is the binding contract setting out exactly what the buyer is purchasing, the purchase price, how it is paid, how much is tied to post-closing milestones, and the closing date. 

The purchase agreement may also contain the indemnification obligations, timelines, limitations, exceptions, and aggregate caps in order to protect the selling entities for potential trailing liabilities. It will typically include provisions for the buyer that shows how issues, disputes, and/or problems are to be settled.

BDO can help

Selling a business can be complicated. We’ve helped advise a number of sellers navigate the sale process every step of the way. We provide legal services alongside our colleagues at BDO Canada using a leveraged team approach. Think of us as a one-stop shop. We look at a transaction from every angle. Contact us to find out how we can help sell your business.