Selling Your Business in BC: The Legal Process from Listing to Closing

Selling a business you have built is a major financial decision, and the legal steps start well before a buyer signs anything. Choices made at the listing and letter-of-intent stage often decide the price, the structure and the risk you carry after closing.

This guide maps the legal process of selling a business in BC from preparation to closing, and flags the points where it pays to involve a lawyer early.

The stages of a business sale

Every sale is different, but most move through the same stages:

• preparation and pricing;
• engaging advisers, and possibly a business broker;
• confidentiality and early talks with buyers;
• a letter of intent;
• the buyer's due diligence;
• the purchase agreement;
• approvals, consents and closing; and
• life after closing.

The legal work is not concentrated at the end. Some of the most expensive mistakes happen in the first few stages, before a lawyer is usually called.

Before you list: preparation and advisers

Buyers pay for what they can verify. Up-to-date corporate records, clear ownership of assets and intellectual property, assignable contracts and a lease with enough term left all support the price. Our article on preparing your business for sale sets out that clean-up, ideally started one to three years ahead.

Your accountant should be involved early. How the sale is structured has a large effect on what you keep after tax, and some tax planning only works if it is in place well before a sale.

If you use a business broker, read the listing agreement carefully before you sign it. Look at the commission and how it is calculated, any exclusivity period, and whether a commission is still payable on a sale to a buyer you found yourself, or one who appears after the agreement ends.

Confidentiality and the letter of intent

Before sharing financial statements or customer information, ask serious buyers to sign a confidentiality (non-disclosure) agreement. It should cover how information may be used, who may see it, non-solicitation of your staff and customers, and the return or destruction of documents if talks end.

Most deals then move to a letter of intent (LOI) or term sheet. It typically sets out the price, whether the deal is a share sale or an asset sale, how the price is paid, key conditions and a timeline. Most terms are usually stated to be non-binding, but some, such as confidentiality and exclusivity, are often intended to bind. The LOI shapes everything that follows, so it is the right time for a lawyer's review, before you agree to an exclusivity period that takes your business off the market.

Share sale or asset sale

The structure is often the biggest single decision.

• Share sale: you sell your shares in the company. The company, with its contracts, history and liabilities, stays intact under new ownership. Sellers often prefer this, partly for tax reasons.
• Asset sale: the company sells the assets the buyer wants, such as equipment, inventory, goodwill and contracts, and keeps everything else. Buyers often prefer this because they choose which liabilities to take on.

In an asset sale of all or substantially all of a BC company's undertaking, outside the ordinary course of business, section 301 of the Business Corporations Act requires approval by a special resolution of the shareholders, and shareholders may have a right to dissent. If you are not the only shareholder, plan for that approval early. Our guide to share purchases and asset purchases explains the trade-offs from the buyer's side.

Due diligence and the purchase agreement

The buyer will examine your corporate records, contracts, lease, employees, financial and tax records, permits, and any disputes. A well-organized data room speeds this up and reduces the chance of a price reduction late in the process.

The purchase agreement is where the risk is allocated. Key terms include the price and any adjustments, holdbacks, earn-outs or vendor financing, your representations and warranties about the business, the indemnity if those prove untrue, and any non-competition or non-solicitation covenants you give. Our article on key terms of a business purchase agreement walks through each one.

Consents, employees and taxes before closing

Several third-party steps can delay closing if left late:

• Landlord consent. Most commercial leases need the landlord's consent to an assignment, and some treat a change in control of the tenant company as an assignment.
• Key contracts and licences. Supplier, customer and franchise agreements may need consent, and some permits and licences cannot simply be transferred.
• Employees. Under section 97 of BC's Employment Standards Act, when all or part of a business is disposed of, an employee's employment is deemed continuous for the purposes of that Act. The agreement should deal with which employees the buyer will keep and who bears the cost of any terminations.
• Provincial sales tax. If your business collects PST, section 187 of the Provincial Sales Tax Act makes a buyer of substantially all of its inventory or business assets, or of an interest in the business, liable for the PST you owe in respect of the business unless the buyer obtains a duplicate copy of a clearance certificate from you. Expect the buyer to ask for one.
• GST/HST. In an asset sale, buyer and seller may be able to elect so that GST/HST is not charged on most of the assets. The agreement should say whether you will elect.

Closing and after

On closing, the lawyers exchange signed documents and funds, and transfers are registered where needed. Your obligations may continue after closing: holdbacks are released only if conditions are met, earn-out payments depend on future results, and your warranties and restrictive covenants run for the periods the agreement sets.

A sale also changes your personal planning. Your will, any shareholders' agreement and your powers of attorney may refer to a business or shares you no longer own, and the proceeds may need a different plan. Review them once the deal closes.

Planning to sell your business? Get advice before you sign a broker agreement or LOI

Our business purchase and sale lawyers can review a listing agreement or letter of intent, prepare confidentiality agreements, negotiate the purchase agreement, and manage consents and closing.

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