Buy / Sell Business on Departure of Owner

Contact Neufeld Legal PC for corporate transactional and legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Circumstances, often unrelated to the business, can effectively force out a business owner and necessitate the sale of the underlying business, including personal burn-out, stress, loss or serious illness of a family member, divorce, criminal activity, personal financial issues. The complexity associated with buying or selling a business is only exacerbated the owner's departure, especially where it is unexpected and not planned, given the significant additional legal, financial, and operational considerations that must be dealt with.

A. Personal Burn-out, Stress, and Loss

From the Seller's Perspective:

• The Challenge: The owner may be emotionally and physically drained, leading to a desire for a quick and easy sale, even if it means accepting a lower price. This can also result in a lack of attention to detail and a failure to prepare the business adequately for sale, which can deter buyers.

• Key Considerations:

  • Emotional Detachment: It's essential to seek professional guidance to manage the emotional toll of the sale.

  • Business Preparation: Despite the desire to leave, the owner must invest time and effort in preparing the business. This includes getting financial records in order, documenting key processes, and ensuring the business is not on a "downhill slide." A neglected business loses value quickly.

  • Succession Plan: Consider internal options like selling to a key employee (management buyout) or transitioning to an employee ownership trust or employee share ownership plan, as these can offer a smoother transition and preserve the company culture.

From the Buyer's Perspective:

• The Opportunity: A seller experiencing burnout may be more flexible on price and terms, presenting an opportunity for a favorable deal.

• Key Considerations:

  • Due Diligence: Conduct thorough due diligence to understand the true state of the business. The owner's emotional state may have led to neglected areas, hidden issues, or a lack of forward-looking strategy.

  • The "Why": Understand the specific cause of the burnout. Is it due to market conditions, an unsustainable business model, or the owner's personal work habits? The answer will reveal potential challenges you may face.

  • Transition Plan: A smooth transition is critical. The buyer should have a clear plan for taking over operations and should be prepared to handle any key employee or customer relationships that were dependent on the previous owner.

B. Divorce

From the Seller's Perspective:

• The Challenge: A business owned by a divorcing couple is often a major marital asset subject to division. This can lead to a court-ordered sale, a forced buyout of one spouse's share, or a highly contentious sale process.

• Key Considerations:

  • Legal Expertise: The seller needs a business attorney and a family law attorney who are experienced in handling divorces involving business assets.

  • Valuation: A business valuation is almost always required. The valuation method and final number can be a source of significant conflict, so it is crucial to have an independent, qualified appraiser.

  • Controlling the Narrative: The owner must maintain a professional front and ensure the divorce-related drama does not negatively impact the business's operations or perception in the market.

From the Buyer's Perspective:

• The Opportunity: The need for a quick sale to satisfy a divorce settlement can create a motivated seller.

• Key Considerations:

  • Legal Complexity: Be prepared for a legally complex transaction. The buyer's legal counsel must ensure that the sale is properly structured to be free of any future claims from either spouse.

  • Business Valuation: The buyer should get their own independent valuation and be cautious of any valuation that seems too high or too low, as it may be skewed by the divorce proceedings.

  • Due Diligence: Scrutinize all business agreements and documents for any spousal involvement or claims.

C. Criminal Activity

From the Seller's Perspective:

• The Challenge: Criminal charges against a business owner can be catastrophic. The company's reputation, finances, and legal standing can be severely damaged. The owner may face asset forfeiture, and the business itself may be subject to fines or legal action.

• Key Considerations:

  • Immediate Action: Seek legal counsel immediately to understand the potential impact on the business.

  • Asset Protection: A sale may be necessary to protect the business's assets from forfeiture or to raise funds for legal fees and restitution. The owner's personal assets and the business's assets may be intertwined, complicating the sale.

  • Disclosure: The owner must be transparent with prospective buyers about the legal issues, as non-disclosure could lead to a voided sale and further legal trouble.

From the Buyer's Perspective:

• The Risk: A buyer is exposed to significant risks, including reputational damage, legal liabilities, and financial penalties.

• Key Considerations:

  • Thorough Due Diligence: This is paramount. A buyer must conduct an in-depth investigation into the nature of the criminal activity and its potential impact on the business. This includes reviewing legal documents, financial records, and employee contracts.

  • Purchase Agreement: The purchase agreement must include robust indemnification clauses to protect the buyer from any past or future liabilities related to the seller's criminal activity.

  • Reputation Management: The buyer must have a plan to rebuild the company's reputation, regain customer trust, and reassure employees and suppliers.

D. Personal Financial Issues

From the Seller's Perspective:

• The Challenge: When an owner is facing bankruptcy, mounting personal debt, or other financial problems, they may be forced to sell the business quickly to raise cash. This distress can lead to a low sale price.

• Key Considerations:

  • Professional Guidance: An owner in this situation should seek advice from a financial turnaround specialist or an insolvency trustee to get the best possible outcome.

  • Transparency: The owner must be honest about their financial situation to avoid complications during due diligence.

  • Bankruptcy Protection: In some cases, a sale under bankruptcy protection can be a strategic move, as it can temporarily prevent creditors from taking action and gives the business time to restructure.

From the Buyer's Perspective:

• The Opportunity: A seller in financial distress is a motivated seller, which can lead to a bargain price.

• Key Considerations:

  • Legal Liabilities: The buyer must be careful not to acquire the seller's personal or business liabilities. The structure of the sale (asset sale vs. share sale) is crucial here. An asset sale is generally preferred in these situations, as the buyer only acquires the assets they want.

  • Due Diligence: Pay close attention to the business's financial health, not just the seller's. Look for signs that the owner's financial problems have affected the business, such as neglected maintenance, supplier issues, or employee turnover.

  • Court Approval: If the sale is part of a bankruptcy or insolvency process, it may require court approval, which can add time and complexity to the transaction.

When it comes to the legal component of corporate mergers & acquisitions, that is when the law firm of Neufeld Legal P.C. comes into play. Such that when your company is seeking knowledgeable and experienced legal representation in orchestrating and completing business mergers, acquisitions and divestitures, contact us at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.

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