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Buying and Selling Businesses

Are you buying the Real Estate or the Business?

Are you buying the Real Estate or the Business? 150 150 Jiang Hong Wilkin Business Law

Some investors think that buying a business means buying real estate, and they are using the OREA real estate purchase agreement. For example, a company is selling assets in a bankruptcy auction, and the draft agreement states the sale is for real estate only. This company is a nursing home, and the senior residents are still living there. If it is only a transaction for real estate, the company would need to relocate all the senior residents and an empty property will need to be left to the buyer on closing. If the buyer would like to continue the nursing home business, they need to buy all the assets from the seller. All the assets, such as senior residents’ services agreements, employees’ agreements, suppliers’ agreements, license, trademark, real estate, equipment, etc., should be transferred to the buyer. This is a full asset acquisition. Real estate is only a part of a full asset acquisition. Therefore, an asset purchase agreement will be needed. The investor should make sure what they want when buying a business.

Should buyer and seller use the same lawyer?

Should buyer and seller use the same lawyer? 150 150 Jiang Hong Wilkin Business Law

The interests of both parties in a transaction are in conflict. A lawyer cannot represent both parties. A lawyer serves his/her client and protects his/her client’s interests. If there is a conflict of interest, a lawyer cannot protect both parties’ interests. What is a conflict of interest? It is where you win and I lose, or your gain and my loss. For example, in a purchase transaction, the seller wants the selling price as high as possible, but the buyer wants the selling prices as low as possible; the seller wants the representations in the contract as little as possible, but the buyer would like the seller to make more representations. Therefore, the interests of the seller and the buyer are in conflict. If they retain the same lawyer, it will be easy to have problems. The conflict of interest will be more complicated if there are multiple parties in a transaction. For example, a company is negotiating with its lender to enforce the mortgage. My client is the guarantor. The interests of the borrower and the lender are in conflict (the lender would like to have the loan paid back as much as possible; but the borrower wants the payback as little as possible). If the borrower’s lawyer think that interests of the borrower and the guarantor are in conflict. It may not be correct. The interests of borrower and the guarantor are the same regarding the pay-off of the mortgage (they both would like to pay as little as possible). There is therefore no conflict of interest at this point. If the guarantor requires the borrower to compensate the paid-off amount, there will be a conflict of interest between them at that time.

When should you hire a business lawyer?

When should you hire a business lawyer? 150 150 Jiang Hong Wilkin Business Law

It is a good time to retain a lawyer when you found the target project. The client should communicate with lawyers during negotiation. Sometimes lawyers need to join in the negotiation. The most important thing is that the letter of intent should be signed after it have been reviewed by the lawyer. Some clients start to look for lawyers after the letter of intent has been signed. It may be too late. The letter of intent is the guide of a project. If there is a mistake in the signed letter of intent, it cannot be changed without consent of the other party. Even if the letter of intent is non-banding to both parties, there still is the risk if one party wants to make changes after it has been signed. First of all, the other party may think you are not reliable. Secondly, since you want to change one term, some other terms may be changed as well. If leaving the mistake there, there will be more troubles. The success rate of a project will be significantly decreased if the letter of intent has problems. Therefore, please do retain lawyers before signing the letter of intent.

What if profit was lower than what the seller said?

What if profit was lower than what the seller said? 150 150 Jiang Hong Wilkin Business Law

When acquiring a company, the seller provides financial information, such as profit. Both parties agree to a selling price based on the financial information. What if the profit after closing is not as high as in the financial statement provided by the seller? There could be a price adjustment clause in the purchase agreement to protect the buyer. If the financial results after closing are worse than before, the selling price would be decreased, and the seller would refund the buyer. The better approach is to pay the price adjustment (a certain amount agreed by both parties) into escrow on closing, rather than waiting for seller to pay. When the price adjustment period is over, the balance will be paid to the seller. The seller may ask to adjust the selling price too. Should the buyer pay more if the financial results are better than before? All these should be negotiated before closing and addressed in the purchase agreement.

Why should you care about valuation of a company when investing?

Why should you care about valuation of a company when investing? 150 150 Jiang Hong Wilkin Business Law

Some client told me that they would like to invest in a private company and acquire 50% of shares of the company. I would ask how much they will pay for the 50% of shares, 1 million dollars or half million dollars? It depends on the valuation of the company. If the client paid 1 million dollars to get 50% shares of a company, it means the company was valued at 2 million dollars after the investment. If the client paid half million dollars to get 50% shares of a company, it means the company was valued at 1 million dollars after the investment. If we do not know the value of a company, there is no point talking about the percentage of shares. Therefore, the value of a company has to be determined before investing. How should we confirm the value of a company? We can hire a valuator. If the client would like to value the company by themselves, there are different approaches for different industries. For traditional industries, the net profit or EBITA will be referenced, usually 5 times of net profit or EBITA. For hi-tech companies, may be 10 or more times of net profit or EBITA. After the value of a company is confirmed, the client can decide how much should be invested for how many shares.

When should the buyer pay the purchase price?

When should the buyer pay the purchase price? 150 150 Jiang Hong Wilkin Business Law

Transaction Closing is the completion of a transaction. Closing is like a purchase where goods are delivered against payment. Goods in this case means legal documents. All the transaction documents should be signed, and proof of satisfaction of conditions, share certificates, company records, keys, etc. should be received, and then the buyer makes the payment to the seller. The transaction is completed once the payment is made. Payment is the last step of a transaction.

Some Chinese investors did not inform lawyers and made payment to the seller before closing. That is to say, they made payment to the seller before receiving any goods. If the seller refused to provide any legal documents, it will be very difficult for the investors to claim remedy.

The investors should keep communicating with lawyers during the transaction and follow lawyers’ instructions. If payment needs to be made in advance, it should be made to the seller’s lawyer’s trust account. The seller’s lawyer will then transfer the payment to the seller after the lawyers have received the “goods”.

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