Preparing Your Business for Sale: The Legal Clean-Up to Start One to Three Years Ahead

Most owners think about selling when an offer arrives or retirement gets close. By then, problems in the company's records or contracts can cost money, slow the deal or give a buyer leverage on price.

This article sets out the legal clean-up a BC business owner can start one to three years before a sale: corporate records, contracts and the lease, intellectual property and staff, and the tax planning that needs a head start.

Why start one to three years ahead

A buyer's lawyer and accountant will test the business before closing. Every gap they find, such as a missing shareholder resolution, a key customer with no written contract, or software that belongs to a former contractor, becomes a reason to lower the price, hold back part of it, or ask for broader indemnities. Some problems take months to fix, and some tax planning only works if it is in place well before a sale. Starting early lets you fix issues on your own timetable rather than under a buyer's deadline.

This is the seller's side of the process. If you want to see what buyers look for, our due diligence checklist for buying a business is a useful mirror.

Bring the corporate records up to date

For a BC company, the minute book is one of the first things a buyer reviews. Section 42 of the Business Corporations Act lists the records a company must keep at its records office, including:

• Constating documents. The certificate of incorporation (and any name change or restoration certificates), and the company's articles.
• Securities and directors. The central securities register, the register of directors, and each director's consent to act and any resignation.
• Minutes and resolutions. Minutes of shareholders' and directors' meetings, and copies of consent resolutions.
• Financial statements. The statements required under the Act for the most recently completed financial year.

Common gaps include share issuances with no supporting resolution, transfers never recorded in the register, missing annual resolutions, and annual reports not filed. Section 51 requires a company to file an annual report within two months after each anniversary of its recognition. Our annual compliance checklist for BC companies covers the routine filings.

If there is more than one owner, review the shareholders' agreement for rights of first refusal, drag-along and tag-along terms, and consent requirements that will apply to a sale.

Contracts, lease and permits

Buyers pay for predictable revenue. Review your key contracts with that in mind:

• Put handshake deals in writing. Major customers and suppliers with no signed agreement are a risk a buyer will price in.
• Check assignment and change-of-control clauses. In an asset sale, contracts may need the other party's consent to assign; in a share sale, a change-of-control clause can give the other party a right to terminate.
• Review the lease. Confirm the remaining term, renewal options and the landlord's consent requirements. If the term is short, negotiating a renewal before going to market can support the value of the business.
• List permits and licences. Note which belong to the company and which would need a new application or a transfer if the business changes hands.
• Resolve disputes. Outstanding claims, threatened lawsuits and regulatory matters should be settled or at least documented.

Intellectual property and people

Make sure the business owns what it uses. Trade names, trademarks, domain names, websites, software, customer lists and social media accounts should be held by the company, not by you personally, a family member or the web developer. Where employees or contractors created important material, check whether written agreements assign their rights to the company, and fix gaps while those people are still easy to reach.

For staff, gather written employment agreements, job descriptions, wage records and any bonus or commission plans. In BC, section 97 of the Employment Standards Act deems an employee's employment continuous when all or part of a business is disposed of, so a buyer will look closely at length of service and outstanding vacation pay even in an asset purchase.

Tax planning needs a head start

The lifetime capital gains exemption can shelter part of the gain on a sale of shares, but only shares that meet the Income Tax Act's definition of a qualified small business corporation share. Among other things, that definition requires that during the 24 months before the sale the shares were not owned by anyone other than you or a related person, and that more than 50% of the fair market value of the company's assets was attributable to assets used principally in an active business carried on mainly in Canada, or to qualifying shares or debt of connected companies. A separate test also applies to the company's assets at the time of sale.

If the company holds surplus cash or investments, getting it to qualify can take planning that has to be done well before a sale. Speak with your accountant early about the exemption, the structure of the sale, and whether a holding company or family trust is involved. We work with your accountant on the legal steps.

A practical timeline

• Two to three years out. Minute book review, share structure, shareholders' agreement, tax planning with your accountant.
• One to two years out. Contracts in writing, IP ownership confirmed, lease renewal, employment agreements updated.
• Six to twelve months out. Organize a data room, deal with any remaining disputes, and plan for your own role after closing.

A sale also changes your personal financial picture, so review your will and estate plan at the same time. See estate planning for BC business owners.

Thinking of selling in the next few years? Start with a pre-sale review

Our business purchase and sale lawyers can review your minute book, contracts, lease and intellectual property, fix gaps before a buyer finds them, and work with your accountant on the structure of the sale.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.