Acquiring a business involves a multitude of crucial steps that often require the expertise of several professionals with skills in various fields. Here are six crucial elements that should not be overlooked before saying “I do!”

1. Think about reselling the desired business, even before making the acquisition

Before even thinking about making an acquisition, whether through the purchase of assets or shares, it is important to review your organization chart and properly position this new addition within it, assures Me Audrey Gibeault, who is also a tax specialist and head of the tax team at Lavery. "To realize a capital gain, each corporation that can be sold must be held directly by the shareholders or their family trusts, to the extent possible. A portion of the gain may be exempt depending on its use." This initial questioning, often overlooked, can result in substantial tax savings, even several hundred thousand dollars. For example, at Logient, this exercise is conducted before each acquisition, continues Me Gibeault. We avoid having to do complex and often costly tax reorganizations later in order to optimize the shareholders' tax situation.

2. Consult a lawyer beforehand

In addition to a tax specialist, the entrepreneur will have everything to gain from involving a lawyer specializing in mergers and acquisitions before even starting the transaction, suggests Me Selena Lu. “During the first discussion, the lawyer will try to understand the entrepreneur’s objective. How does this transaction fit into his strategy? Why does he want to buy the target company? Does he want to expand in Canada? Does he want to absorb a competitor? Does he want to benefit from the workforce? Does he want to appear more attractive in order to resell later? Will the seller agree to finance part of the transaction? This will allow him to have a better understanding during the due diligence, but also to know the important points to negotiate and what boundaries should not be crossed.”

The strategy that will then be implemented will be at the heart of the transaction and will dictate several decisions thereafter. The sooner the lawyer intervenes in the transaction, the sooner he will be able to take charge of the file in order to ensure that it is successfully completed. Generally, the lawyer will act as the conductor of the transaction. In addition to leading the negotiations, he will work in concert with the banker, the tax specialist and the accountant to implement the transaction.

3. Structure your financing

Acquisitions are generally in the order of several million dollars and often require external financing. In order to properly structure the financing, Me Audrey Gibeault recommends ensuring that the interest paid on the loan will be deductible against the income of the active business. "It is necessary to verify that the interest expense is incurred in a profitable entity, therefore one that pays tax. For the purposes of the acquisition, a new corporation, called Acquisico, is most often used to purchase the seller's shares. Following the acquisition, it is important to merge Acquisico with the operating company in order to allow the interest expense to be deductible in the operating company and not in Acquisico, a company that has no income."

4. Offer and letter of intent

The main difference between the offer to purchase and the letter of intent is that the former binds the parties while the latter generally serves as a basis for discussion between the parties. Since the offer or letter of intent is the starting point and foundation of the transaction, it must be clear and well-written in order to facilitate the work of all stakeholders. In particular, the banker will request a copy of the signed offer to build his financing file. In addition to business terms such as the cost of the acquisition and the payment terms, you will find in this document the conditions of the transaction, the framework of the due diligence, the confidentiality and exclusivity clauses.

Without conducting due diligence at this stage of the transaction, it is recommended to do some research before drafting the offer. "Our job as lawyers is to create a file on the target: see their interests and their weaknesses," explains Selena Lu. For example, we can take out a press review on the company, its shareholders, its directors and we build the strategy accordingly." Given the importance of the offer, it is therefore risky to try to draft it yourself or to take a broker's version.

5. Prepare your exit

Even if the reflex seems counterintuitive, the exit strategy must be thought through from the start. "For tax reasons, it is a question of determining what the short- and medium-term game plan is: keep the business, grow it or sell it quickly? In Canada, each individual holding shares in a private company can generally claim a capital gains exemption of approximately $892,000, which allows the entrepreneur to not pay Part I tax on any capital gains realized up to the amount of the exemption when reselling their shares.

Depending on the objectives, the time could be right to create a discretionary family trust, adds Me Gibeault: "The objective would then be to multiply the capital gains exemption by the number of beneficiaries (spouse, children, family) in place at the time of the sale of the business. It is only from the establishment of the discretionary family trust that the capital gain of the business increases in the hands of the trust and that it is then possible to multiply the capital gains exemption upon the ultimate sale of the business. Contrary to popular belief, it is generally not relevant to set up a family trust when talking about selling the business. The discussion must take place as soon as the acquisition is made in order to position oneself well for the future."

6. Determine the role of sellers

Will the vendors stay? Will they become employees? Consultants? What will happen before, during and after the transaction? These questions are critical to ensuring a smooth transition with the vendors. “There are several things to consider depending on the age of the vendors and the role they will play in the company after the transaction,” says Lu. “Retaining key employees in the company – such as a restaurant chef – should be included in the agreement to ensure the survival and growth of the business.”

It is also important to carefully negotiate non-competition and non-solicitation clauses to prevent the seller from opening a competing business nearby by hiring employees of the company he sold.