Before Selling a Business

Here are five items to consider before you sell your business.

#1 – Is this an asset sale or a share sale?

On the high level, buyers prefer an asset sale over a share sale, and vice versa for the sellers. This is because an asset sale allows the buyer to cherry-pick the company’s business assets without assuming the liabilities; in a share sale, however, the buyer assumes both the assets and the liabilities. From the seller’s perspective, however, it’s generally more advantageous to do a share sale instead as there are some circumstances where this allows the seller to participate in the life-time capital gains exemption (up to $1,250,000 as at April 2025), which can result in significant tax savings.

#2 – If a share sale, is your company’s minute book up to date?

Buyers often review the company’s minute book at the early stage of the transaction as part of their due diligence to ensure the shares being sold are validly issued and that there are no deficiencies in historical corporate actions. This review can sometimes also uncover potential legal or financial liabilities. If your company does not have a minute book, or the records are deficient, it poses a red flag to the buyer; for the most part this is not unsalvageable, but it is something that does need to get rectified at an early stage.

#3 – Have you reviewed your lease?

The value of your business often is tied to the location from which it operates, and therefore any lease that governs the business’s occupation of that property is important. There are two main things that a buyer would look at: (i) the longevity of the lease, and (ii) cost of rent. Therefore, before you sell your business, you should specifically look for the following in your lease:

• How long is the remaining lease term?
• Any further option(s) to extend the term or renew the lease?
• Any demolition clause?
• How much is base rent?
• How much is additional rent?
• Any restriction on transferring the lease to the buyer or on changing ownership of a corporate tenant?
• What are the conditions that must be met to transfer the lease or change ownership of a corporate tenant?
• Did you provide any personal guarantee?

#4 – Your Employees

When there’s a business sale, BC’s employment laws require that the buyer (being the new owner) treat the employee’s employment as continuous and interrupted. This means that the employee’s length of service is grandfathered by the buyer, which factors into their compensation, benefits, and severance upon termination. However, in negotiating a sale, a buyer might require that a seller terminate employees and pay them severance pay so that the buyer can re-hire them without having to grandfather prior service. Severance pay is often a contentious point between the buyer and the seller, particularly so if the employer does not have a written employment agreement with the employee where it explicitly caps the employer’s severance liability to the minimum required under the applicable employment laws. From the seller’s perspective, the more they can pass the buck to the buyer the better. From the buyer’s perspective, the seller should pay out severance and terminate employees because the buyer didn’t receive the benefit of the employee’s past services. That said, grandfathering some or all prior service can make the transition smoother for employees. To resolve this tension, the parties would often adopt a coordinated approach where the seller would first terminate the employee’s employment by way of a “notice of termination”, and immediately after the buyer would provide an employment offer by way of an “offer of employment”; this way the buyer gets a clean slate with the employee to re-set the clock for length of service, and the seller would only be liable for that portion between the employee’s date of hire and the date of termination.

#5 – Non-Competes

Most purchase agreements will contain a non-compete provision for a limited duration and geographic scope. The upshot is that the buyer does not want you to compete with them (whether directly or indirectly) after they spent significant money in buying your business. Therefore, you should consider what your end goal is before you sell your business:

• Are you looking for retirement?
• Are you starting a new business but in a different industry? Or a different geographic location?
• Are you working in someone else’s business that’s in the same industry?

Whatever your decision is, it’s best to have a candid discussion with the buyer at the outset so you can better manage the buyer’s expectation, and consequently the lawyers on both sides can better calibrate the non-compete provision in the purchase agreement to better serve the parties’ intended purposes.

If you need legal help in selling your business, we are here to help!