Are you doing research into selling a business in Quebec? Maybe you have decided to sell your small or medium-sized business.
After spending years working hard to build it, it is time to pass on the torch.
You have been through tough times and good times. You have built a solid team. Families depend on you to earn a living. You have developed strong relations with suppliers and clients.
It’s important to see your business continue to grow and prosper.
You need to find the right buyer. This implies more than just getting the highest price for your business. You need a buyer who will take proper care of your baby: you have spent too many years building it up to see it dismantled or go down in flames.
Let us look at some of the practical and legal aspects of a purchase-and-sale transaction.
The first thing you need to do…is to make sure you want to and are ready to sell.
I have seen too many business owners change their minds midway through the sale process.
Not a good idea.
Basic retirement planning
One owner decided not to sell after realizing that investing the sale price would not provide as much return as running the business…Basic retirement planning you say? Sadly, most business owners are not prepared for retirement. They do not have a plan.
Proper planning should begin approximately 5 years before you want to sell. This allows you to optimize your business for an eventual sale. It also allows you to prepare for retirement.
Optimizing your business means putting your business in the best condition possible. Painting your office. Modernizing production. Cutting down on waste. Getting new clients.
Writing an operation manual. Everything you can do to raise the value of your business and to make it less dependant on your presence.
Selling a Business in Quebec
So, you improve your business. Then it is time to find out what you can sell it for.
The best way to find out the market value is to hire a business valuation consultant. Depending on the business, you might need a regular business broker or a certified business valuation expert. Your accountant may help.
A valuation report in Quebec
You receive a valuation report. It should reflect what a buyer might be willing to pay for your business: fair market value.
Luckily for you, these days, there are hundreds of potential buyers for almost every kind of business in Quebec. It is a sellers’ market.
Your broker just called you to mention he has a potential buyer. What happens next?
You ask the potential buyer to sign a confidentiality and non-disclosure agreement (NDA) to protect the confidential information you will provide: the valuation report.
It usually contains financial statements for the last 3 years. There will also be an employee list with salaries. Additional things might include:
- a full description of the business activities (products or services, territories covered, number of clients, proprietary technologies, etc.)
- a list of equipment
- photos of the facilities
- a copy of the lease, etc.
You have prepared this with your accountant and broker.
A letter of intent (LOI)
If the potential buyer likes what the valuation report says, he submits a letter of intent (LOI) to buy the business (also known as an offer to purchase). This should be carefully reviewed by your lawyer.
It is most likely non-binding but sets out the main terms and conditions of an eventual purchase.
The buyer intends to purchase the business at a certain price, under some conditions. Being satisfied with the information which will be discovered during the due diligence process, getting proper financing. There can also be other conditions, as each situation is unique.
The due diligence process allows the potential buyer to verify all the important financial and legal information about the business. The financial aspect covers the information provided in the financial statements, as well as tax aspects.
The legal aspect concerns itself with the absence of lawsuits. It also covers hypothecs or liens the business might have granted on its receivables, equipment and/or other assets to guarantee debts. Permits and/or licences required are checked.
Business leases
If the business leases its premises, a review is done so that a lease transfer or a re-negotiation of its terms or a whole new lease is concluded as needed.
Employee and/or union collective agreements are reviewed, like all other important contracts and agreements.
Once the parties agree on the due diligence results and required actions (if any), it is time to prepare the main purchase and sale agreement.
Selling a Business in Quebec
A potential buyer, through a corporation or two (as warranted by the form of the transaction), may purchase your shares of the existing corporation operating the business. He may also choose to buy only the business’s assets.
You, as most small business owners, would rather sell your shares to benefit from the capital gains tax exemption on the first $892 218 in value. This allows you to save over $200 000 in taxes. If a buyer insists on purchasing the assets, the price can be adjusted to reflect tax consequences you would suffer.
Banks will usually finance a small business purchase up to 50%, expecting that the buyer will provide 20% of the price and the seller will finance 30% as a balance over a few years.
You must be ready to finance part of the transaction. But as each deal is unique, financing options vary, especially in a sellers’ market.
Once the terms and conditions of the sale agreement are agreed upon, it is time for your lawyer to draft more documents. These are corporate resolutions, government forms, etc.
The transition period
You must then consider the transition period during which you must remain available to the new owner to guarantee a smooth transfer. The transition period allows the buyer to benefit from your experience and contacts.
Information provided should include all there is to know about the business’s services or products, employees, clients, suppliers, marketing, competitors, procedures, trade secrets, intellectual property, plans for growth, opportunities, and risks…
Once all the documents are agreed upon, it is time to close the deal. Selling a business in Quebec is a long process, and that’s why you need to speak to a law firm.
Parties meet and spend a few hours signing all (paper) documents. In these pandemic times, electronic signatures and virtual closing rooms are getting more popular. These allow people to sign all documents from the comfort of their home or office.
Selling a Business in Quebec
At closing, you will receive a large part of the purchase price. It usually is 50% or more of the purchase price. A fraction of the price is withheld by the buyer’s lawyer in a trust account, for a few months.
This allows the parties to find out if some bills were paid in advance or late if equipment broke if some inventory was missing, receivables were collected…All this allows the parties to adjust the price to reflect small changes.
Once the parties agree upon the price adjustments (or lack thereof), the price adjustment agreement is concluded. The balance of the sale price is paid to the seller.
The deal is finally completed. Congratulations!
This article is for informational and educational purposes only. It does not constitute legal advice. Laws and regulations change constantly.
For individual legal advice, please contact Pierre de Boucherville at: pdeb@ddpqc.ca or 514-312-5923 extension 102 or 1-888-284-9523.