Buying a business? How to protect yourself from potential liabilities
If you’re looking to purchase an existing business, your timing is good. The baby boom generation is heading for retirement, creating opportunities for entrepreneurs looking to acquire a business.
But acquiring an existing business can come with liability issues that have the potential to cause serious losses. Properly structuring the transaction and conducting thorough due diligence before the purchase can go a long way toward protecting you as a buyer.
In terms of taxation, sellers will probably prefer a sale of shares. That’s because the vendor may be eligible for a lifetime capital gains exemption of more than $800,000 when selling shares of a small business.
How can a buyer be protected?
As a buyer, the most important thing you can do to protect yourself when buying a business in whole or in parts is to conduct due diligence.
You should begin by doing a series of searches in government databases, focusing on the province where the company and its operations are located.
- Search the Personal Property Security Registry (the Register of Personal and Movable Real Rights in Quebec) to determine whether there are any liens on the assets you are about to purchase.
- Check that the business has paid all its taxes.
- Obtain the registration documents to ensure buildings and vehicles are owned by the seller.
- Ensure that there haven’t been any registrations pursuant with Section 427 of the Bank Act.
- Check for pending lawsuits, human rights complaints or bankruptcy filings.
- Contact the Workers Compensation Board to make sure the seller is in good standing.
- Contact the municipal government to determine if the company has appropriate licences and if the current use of property is permitted.
You’ll also want to examine a number of documents:
- Incorporation documents
- Company minutes
- Contracts
- Inventory lists
- Audited financial statements
Make sure you obtain good legal and financial advice before moving forward with any deal.
Consider an indemnity agreement
Even if you and your team have gone over every piece of documentation, you could still be liable for something the seller did or failed to do before handing over the business.
You can protect yourself by getting an indemnity agreement from the seller, promising to be responsible for any unforeseen liability that could arise for a period after the sale. From the seller’s perspective, this could be a concession to convince the purchaser to do a deal.
The content of this article is provided for general information purposes only and does not constitute legal advice. Readers are encouraged to consult their own legal counsel to obtain the legal advice they need regarding any particular legal matter.
The most dangerous unknown liabilities often arise from the seller's pre-sale activities. As a buyer, the most important thing you can do to protect yourself when buying a business as a whole or in parts is to conduct due diligence.
In terms of taxation, sellers will probably prefer a sale of shares. That’s because the vendor may be eligible for a lifetime capital gains exemption of more than $800,000 when selling shares of a small business.
How can a buyer be protected?
As a buyer, the most important thing you can do to protect yourself when buying a business in whole or in parts is to conduct due diligence.
You should begin by doing a series of searches in government databases, focusing on the province where the company and its operations are located.
- Search the Personal Property Security Registry (the Register of Personal and Movable Real Rights in Quebec) to determine whether there are any liens on the assets you are about to purchase.
- Check that the business has paid all its taxes.
- Obtain the registration documents to ensure buildings and vehicles are owned by the seller.
- Ensure that there haven’t been any registrations pursuant with Section 427 of the Bank Act.
- Check for pending lawsuits, human rights complaints or bankruptcy filings.
- Contact the Workers Compensation Board to make sure the seller is in good standing.
- Contact the municipal government to determine if the company has appropriate licences and if the current use of property is permitted.
You’ll also want to examine a number of documents:
- Incorporation documents
- Company minutes
- Contracts
- Inventory lists
- Audited financial statements
Make sure you obtain good legal and financial advice before moving forward with any deal.
Consider an indemnity agreement
Even if you and your team have gone over every piece of documentation, you could still be liable for something the seller did or failed to do before handing over the business.
You can protect yourself by getting an indemnity agreement from the seller, promising to be responsible for any unforeseen liability that could arise for a period after the sale. From the seller’s perspective, this could be a concession to convince the purchaser to do a deal.
The content of this article is provided for general information purposes only and does not constitute legal advice. Readers are encouraged to consult their own legal counsel to obtain the legal advice they need regarding any particular legal matter.