Selling Your Business in BC: Legal Issues to Address Before the Deal

Selling a business in British Columbia involves much more than agreeing on a purchase price. Sellers must consider due diligence, confidentiality, employee obligations, contracts, representations and warranties, and the conditions that must be satisfied before closing.

If you are selling a business in BC, getting advice from a business and corporate lawyer early can help identify risks before they become deal-breaking issues.

Asset Sale or Share Sale?

One of the first decisions is whether the buyer will purchase the company’s shares or selected business assets.

In a share sale, the buyer acquires ownership of the corporation, which generally continues to hold its existing assets, contracts, employees and liabilities.

In an asset sale, the buyer purchases specific assets such as equipment, inventory, intellectual property, customer relationships, goodwill or leasehold interests.

The structure can affect taxes, liabilities, contracts and employee obligations, so sellers should usually obtain both legal and accounting advice before finalizing the deal.

Prepare for Due Diligence

Due diligence is the buyer’s review of the business before closing.

A purchaser may ask to review:

• corporate records;
• financial statements and tax information;
• leases and major contracts;
• employment agreements;
• intellectual property;
• financing and security interests;
• licences and permits; and
• pending litigation or disputes.

Sellers should organize these records before negotiations become advanced.

A pre-sale legal review can also help identify missing corporate records, consent requirements, employee issues or other problems before the buyer discovers them.

Protect Confidential Information

Selling a business often requires disclosure of sensitive information, including customer lists, pricing, financial results, employee information and business strategies.

Before providing that information, sellers should consider using a confidentiality or non-disclosure agreement (NDA).

An NDA can restrict how information is used, who may access it, and whether the buyer may contact employees, customers or suppliers. This is especially important where the prospective buyer is a competitor.

Review the Letter of Intent Carefully

A letter of intent, or LOI, usually sets out the basic terms of the proposed sale before a final purchase agreement is negotiated.

An LOI may cover:

• purchase price;
• asset or share sale structure;
• due diligence;
• financing;
• exclusivity;
• confidentiality;
• closing date; and
• major closing conditions.

Although many LOIs are largely non-binding, some provisions may be legally enforceable.

A seller should have a lawyer review the LOI before signing, particularly if it includes exclusivity, deposits, restrictive covenants or other binding terms.

Understand Representations and Warranties

The purchase agreement usually contains representations and warranties about the business.

A seller may be required to confirm matters relating to:

• ownership;
• financial information;
• taxes;
• employees;
• contracts;
• litigation;
• intellectual property; and
• regulatory compliance.

These provisions should not be treated as boilerplate. If a statement later proves inaccurate, the buyer may have a contractual claim against the seller.

Sellers should therefore confirm that representations are accurate and consider whether they require limits based on knowledge, materiality, time periods or liability caps.

Address Employees Early

Employees can be a significant issue in a business sale. In a share sale, the employer corporation generally remains the same legal entity.

In an asset sale, additional employment-law considerations may arise. Section 97 of BC’s Employment Standards Act provides that where all or part of a business is disposed of, employment is deemed continuous for purposes of the Act. The Province provides further guidance on employment continuity when a business is sold.

The parties should consider:

• which employees will remain;
• accrued vacation and bonuses;
• employment agreements;
• severance exposure;
• benefit plans; and
• employee communications.

Review Contracts and Consent Requirements

Important contracts may contain clauses requiring consent before they can be assigned or before control of the company changes.

This can affect:

• commercial leases;
• customer agreements;
• supplier contracts;
• financing arrangements;
• franchise agreements; and
• licences.

Sellers should identify these provisions early. Discovering a required landlord, lender or customer consent immediately before closing can delay or threaten the transaction.

Know the Closing Conditions

Most purchase agreements contain conditions precedent that must be satisfied or waived before closing.

Common conditions include:

• satisfactory due diligence;
• financing;
• landlord or third-party consent;
• regulatory approval;
• discharge of security interests;
• corporate approvals; and
• delivery of required documents.

The agreement should clearly state who is responsible for satisfying each condition and what happens if it is not met.

Deal With Debt and Personal Guarantees

A business sale does not automatically release the seller from personal guarantees.

If you have personally guaranteed a:

• business loan;
• line of credit;
• commercial lease; or
• supplier account,

you should confirm whether the creditor will provide a written release. Sellers should also identify any liens or security interests that must be discharged at closing.

Consider Post-Closing Restrictions

Buyers often require non-competition, non-solicitation and confidentiality obligations as part of the sale. These provisions can restrict what the seller may do after closing, including whether they can:

• operate a competing business;
• solicit former customers;
• hire former employees; or
• use confidential business information.

The geographic scope, duration and prohibited activities should be reviewed carefully.

Common Mistakes When Selling a Business in BC

Some of the most common problems include:

• sharing confidential information before signing an NDA;
• signing an LOI without legal review;
• failing to organize corporate records before due diligence;
• ignoring employee obligations;
• agreeing to overly broad representations and warranties;
• overlooking contract consent requirements; and
• assuming personal guarantees disappear after the sale.

Early preparation can significantly reduce these risks.

When Should You Speak With a Business Sale Lawyer?

Ideally, before signing an LOI or accepting a binding offer. A lawyer can help with:

• transaction structure;
• confidentiality agreements;
• LOI negotiations;
• due diligence;
• purchase agreements;
• representations and warranties;
• employee issues;
• contract consents; and
• closing documents.

ALG Lawyers’ Business & Corporate Law team assists BC businesses with business sales, acquisitions, restructuring and commercial transactions.

Key Takeaway

If you are selling a business in BC, preparation matters. The strongest transactions address due diligence, confidentiality, employee obligations, contracts, representations and closing conditions before the parties become fully committed.

The goal is not simply to complete the sale. It is to complete it on terms that protect the seller and reduce the risk of disputes after closing.

Speak With a Business Sale Lawyer in BC

If you are preparing to sell a business, professional practice or corporation, legal advice before signing an LOI or purchase agreement can help you understand the risks and negotiate from a stronger position. Problems found during due diligence are far cheaper to fix before you list. Contact ALG Lawyers to discuss buying and selling a business.