Legal Considerations: The Buyer's Perspective
As a buyer, what should you keep in mind when the buy-sell contracts are being drafted. Velletta explains that you should consider the following:
- Depending on whether you buy the shares or assets of the business your contract will look different.
- Every contract is different. Each type of business will have its own set of considerations in the contract.
- When drafting the buy-sell contract, you need to include stipulations about things such as representations about ownership, and taxes being paid. In lay terms, you want to ensure that you are not buying any hidden timebombs, such as several years of back taxes that will cause a massive bill when you take ownership.
- A vital consideration: the contract must guarantee that the company's assets are not encumbered by liabilities.
- You also need to make sure that all outstanding bills have been paid.
- Consider adding a clause that allows you to work in the business until the closing of the final sales date. A bailout clause can give you a backdoor if you find any significant discrepancies during this period.
- You need to know if there are other contracts such as leasing agreements, employment contracts, and licensing agreements. If other contracts exist, you will want to know their terms before signing a buy-sell agreement.
- Other considerations should include looking at the status of present and past employees. Are there any pending lawsuits over wrongful dismissal that could be passed on to a new owner?
- Consider getting a non-competition covenant. While these may be difficult to enforce in Canada depending on the specific terms, this should protect your from scenarios such as a popular restaurant owner or hairstylist opening up a new shop just a few doors down from the one they sold to you. You clearly set-out the amount you are paying for the non-competition covenant, so that you can deduct this amount (for tax purposes) against the ordinary income of the business over the life of the covenant.
 Legal Considerations: Introduction & the Buy Sell Agreement |
Legal Considerations: The Seller's Perspective |