Top 3 mistakes small businesses make before a sale

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Over my almost 20 years of experience advising small business owners with mergers and acquisitions, including hundreds of reorganizations, asset sales, and share sales, I have noticed a curious pattern: most vendors spend more time preparing their home or condo for a real estate sale than they do for a sale of their business.

Once you have listed your residence for sale with a realtor, typically you will mow the lawn, fix that squeaky door hinge, perhaps even hire a home stager to stash the family portraits and spruce up the interior before the showings. But, for some reason, I have encountered a number of small business owners who have taken almost no steps to prepare their enterprise for a pending sale transaction. It is often the case that the fair market value of the assets or shares of the business being sold exceeds the dollar value of the home or condo, yet more attention is being paid to the residential conveyance.

Accordingly, I have assembled my list of the top 3 mistakes that small business make before a sale:

  1. Failure to Maintain Corporate Records. All companies in British Columbia are required under the Business Corporations Act to maintain what is known as a “minute book”. This is a binder containing the charter documents of the company, as well as, the annual consent resolutions of the shareholders and directors, and the Annual Reports filed with the Registrar of Companies. Too often I am retained to assist a client with a sale of the shares or assets of a company and the corporate records are missing or otherwise deficient. For cost saving reasons, some small business owners choose to maintain their own “minute book”, rather than having a law firm act as the registered and records offices to handle filings. Corporate records prepared and maintained without legal assistance are almost without exception missing key information or unavailable. In order to close the commercial sale, all of the non-existent or incomplete corporate records will need to be brought up to date: frequently at increased cost in terms of the legal fees to prepare and often resulting in the delay of closing the transaction. Simply put: no current “minute book”, no sale.
  2. Failure to Seek Accounting and Tax Advice. You should consult with a CPA before entering into any Letter of Intent or definitive Share Purchase Agreement or Asset Purchase Agreement. How the sale is structured will have a crucial impact on the tax treatment of your net sale proceeds. Again, for cost saving reasons, some small business owners will contact only a bookkeeper for advice, while a CPA with proper taxation experience would have been able to have saved the client tens if not hundreds of thousands of dollars in taxes with the optimal structure before disposition. This may include a pre-closing corporate reorganization of the company, such as a “purification” to make use of the lifetime capital gains exemption for the sale of shares of a qualified small business corporation, potentially making the sale proceeds tax-free. I recall a past client who received bad tax advice from an inept practitioner and signed a binding Asset Purchase Agreement for the sale of her business that included a commercial real estate property. As the transaction was structured as an asset sale rather than a share sale, the difference to the client was a capital gains tax bill of over $100,000.00, as opposed to $0.00.
  3. Failure to Retain Experienced Legal Counsel. If you notice a recurring theme in the narrative above, it is that of small business owners being “penny-wise and pound-foolish”, which means to be extremely careful about small amounts of money and not careful enough about larger amounts of money. Relatively minor expenditures such as paying annually to keep the corporate records up to date or hiring a qualified CPA for tax planning and structuring, ultimately would have saved the client money: as in the example above, $100,000.00 or more. The same may be said about retaining a lawyer to handle your share or asset sale. The disposition may be to a larger competitor, to senior management and employees, or to the next generation of family members as part of a succession plan. In all cases, you should ensure that you hire a lawyer that actually has experience with corporate transactions and the sale of businesses. There are nuances in reviewing and negotiating the definitive purchase agreement and the ancillary closing documents with the purchaser’s counsel that a lawyer who specializes in this practice area will be aware of through “boots on the ground” experience. A general practitioner may purport to be able to assist, but beware of the jack of all trades, master of none. As with tax advice, sage legal counsel on the sale may limit your exposure to infinite personal liability and potentially add value in terms of your peace of mind and the final sale proceeds that end up in your wallet. To conjure up a medical analogy: you need a cardiologist rather than your family GP for the matter.

Scott T. Johnston is a Partner of CBM Lawyers LLP with over 19 years of experience practising corporate/commercial transactions, commercial and residential real estate, and secured lending law. The general information contained in this column should not be treated by readers as legal advice or opinion and ought not to be relied upon without detailed legal counsel being sought.

Scott T. Johnston is the Partner, CBM Lawyers LLP, www.cbmlawyers.com.

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