Purchase of a Business – What Are Usual Or Typical Conditions Precedent That a Purchaser Would Want in an Asset Purchase Agreement

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Introduction:

Before completing an asset purchase agreement, prudent purchasers include conditions precedent to ensure certain essential requirements are met. These safeguards protect their interests, mitigate risks, and pave the way for a successful acquisition. In this blog post, we’ll explore the typical conditions precedent that purchasers seek to assert in an asset purchase agreement to make well-informed and secure investment decisions.

Reviewing Contractual Obligations: An important condition precedent involves the review of material contracts related to the target business. Purchasers want to ensure that all contracts have been disclosed and that there are no existing breaches or defaults that could impact the acquisition.

Due Diligence: Another key condition precedent is conducting thorough due diligence. This involves an in-depth assessment of the asset. In the case of real estate, due diligence could include an appraisal, geotechnical engineering reports and an environmental assessment.  In the case of equipment, the purchaser may want an evaluation completed to determine its operating condition.

Obtaining Consents and Approvals: To ensure a smooth transition, purchasers want confirmation that the seller has obtained all necessary consents, approvals, and permits required for the transfer of assets and ongoing business operations. This includes approvals from regulatory bodies and third-party stakeholders.

Clear Title and Ownership: Purchasers seek assurance that the assets being sold have clear title, free from any encumbrances or disputes.

If you’re not sure if all of your obligations and rights have been met or are fair and legal during the course of purchasing or selling a business or commercial property contact Heath Law on Vancouver Island.

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What Are Usual or Typical Conditions Precedent That a Purchaser Would Want in a Share Purchase Agreement

Key Differences Between an Asset Purchase and a Share Purchase in Business Acquisitions

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What are the usual adjustments in the purchase or sale of a home in Nanaimo?

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In British Columbia, certain adjustments need to be considered to ensure a fair distribution of costs between the Buyer and the Seller. Adjustments are typically based on the Buyer and Seller’s ownership of the property throughout the year. There are many potential adjustments that may be required in a transaction. However, in this article, we will explore the typical adjustments involved in the purchase or sale of a home in British Columbia.

  1. Property Taxes: Property taxes are payable once in a calendar year. The Seller pays taxes up to the closing date, while the Buyer assumes responsibility thereafter. Often the precise amount of taxes is not known at the time of the adjustment calculation, so a 5% increase from the previous year’s taxes is used. However, upon receipt of the tax bill, the amount may have to be readjusted.
  2. Strata Fees: For transactions involving strata properties, the strata fees are adjusted. The Seller pays the fees up to the closing date, and the Buyer takes over from then on. If a Special Levy has been issued prior to closing, it is usually the Seller’s obligation to pay it in full.
  3. Utilities: Utilities, such as electricity, gas, sewer, garbage collection, and water, are often adjusted. The Seller is responsible for paying the utility costs up to the closing date, while the Buyer takes over the expenses from the closing date onward.
  4. Deposits: Any deposit made by the Buyer is credited to the Buyer on the Buyer’s statement of adjustments.
  5. Rent and Security Deposit: If the transaction involves a rental property, an adjustment for rent may be needed unless the adjustment date falls on the same day that rent is payable. The Security Deposit is usually credited to the Buyer as it becomes an obligation owed by the Buyer to the tenant.

Are you purchasing or selling a home in Nanaimo and have a question? Contact us to ensure that all of your obligations and rights are covered.

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Vendor Financing in Business Sales: Security/Collateral and Key Considerations for Sellers

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What is Vendor Financing?

 

Vendor financing is a financing option where the seller of a business provides financial assistance to the buyer to help them complete the purchase. Many business sales involve vendor financing for at least a portion of the purchase price.

 

Why do Sellers Offer Vendor Financing?

 

Vendor financing offers several advantages to both buyers and sellers. Firstly, it attracts a larger number of potential buyers who may have difficulty obtaining traditional bank loans, thereby expanding the pool of interested parties. Secondly, it can lead to faster deal closures, streamlining the sales process and reducing the time it takes to finalize the transaction. Finally, seller financing can enable sellers to negotiate a higher selling price by providing an attractive incentive to the buyer, making the business or property more appealing. These benefits make vendor financing an attractive option for those looking to buy or sell a business or property.

 

Security and Collateral for the Seller

 

Security agreements for personal property: These grant the seller a security interest in specific assets owned by the purchaser. The security agreement may be general, offering broader protection covering the present and future assets of the purchaser.

 

Personal guarantees: Obtained from the principals of the Purchaser, making them personally liable for the repayment obligations of the Purchaser.

 

Mortgages over real estate: The Purchaser grants a mortgage to the Seller on the property being acquired.

 

Share escrows: Act as security for the unpaid purchase price, the seller retains physical control of the shares of the Company being purchased and if the Purchaser defaults on their repayment obligations the Seller regains control of the Company.

 

Assignments of life insurance: The seller may require the buyer to assign a life insurance policy to them as collateral. This ensures that, in the event of the buyer’s death, the seller will receive the policy’s proceeds to cover any outstanding debt or obligations.

 

Main Considerations of Vendor Financing

 

The length of the term and the interest rate applicable to the vendor financing are crucial aspects negotiated between the parties. Risk and return play a significant role, as the seller gains potential buyers and a higher chance of selling the property or business, but also faces the risk of non-payment or default. Flexibility is a key advantage of vendor financing, providing buyers with more accessible down payment options and flexible repayment schedules. Proper due diligence is necessary to assess the financial health of the property or business and ensure the viability of the financing arrangement. Additionally, legal documentation, including promissory notes, security agreements, guarantees and mortgages, is vital to safeguard both parties interests and facilitate a smooth transaction. Lastly, the tax implications of vendor financing must be carefully evaluated with the assistance of tax advisors to understand the potential tax consequences for both the buyer and seller.

 

 

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Purchase of a Business – What Are Usual or Typical Conditions Precedent That a Purchaser Would Want in a Share Purchase Agreement

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Introduction

Acquiring shares in a company is a momentous decision that demands careful consideration and protection of the buyer’s interests. Within a share purchase agreement, conditions precedent play a pivotal role in safeguarding the purchaser’s investment. In this blog post, we’ll explore the vital conditions that purchasers typically seek in a share purchase agreement to ensure a seamless and secure acquisition process.

Key Conditions Precedent

Due Diligence: This comprehensive examination assesses the target company’s financial, legal, operational, and regulatory aspects, uncovering potential risks and liabilities. This would include a review of financial statements and tax returns.

Consents and Waivers: Assurance that all required consents, approvals, and waivers from third parties, such as lenders or business partners, are obtained, facilitating a seamless transfer of ownership.

Material Adverse Change: Buyers require confirmation that no significant adverse changes have occurred in the target company since the initial negotiations began, protecting them from unexpected challenges.

Litigation Assessment: Verifying the absence of pending lawsuits or legal disputes is crucial to gauge the company’s overall stability and reputation.

Employee Matters: Addressing employee-related issues, such as agreements, benefits, and severance obligations, ensures a smooth transition and fosters employee goodwill.

Clear Title to Shares: Purchasers must verify that the seller has clear and marketable title to the shares, free from any encumbrances or claims.

Financing Arrangements: If external financing is required, purchasers may include conditions to obtain necessary financing commitments, securing the funds for the acquisition.

Tax Compliance: Ensuring the target company is up-to-date on tax matters and has no outstanding liabilities safeguards the purchaser from future tax burdens. A holdback may be required to offset the risk of unpaid tax.

Corporate Governance: Compliance with corporate documents, bylaws, and constitutional requirements establishes a stable foundation for the acquisition.

Intellectual Property Rights: Confirming the ownership or proper licensing of essential intellectual property assets is crucial to maintaining business continuity.

Asset Investigations: whether the land, equipment and inventory owned by the target company are in a certain state or condition and are clear of any charges, liens or encumbrances.

Not what you’re looking for?  Read What Are Usual Or Typical Conditions Precedent That a Purchaser Would Want in an Asset Purchase Agreement? 

Or Key Differences Between an Asset Purchase and a Share Purchase in Business Acquisitions

 

 

 

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Key Differences Between an Asset Purchase and a Share Purchase in Business Acquisitions

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Introduction:

When buying a business in British Columbia, two primary methods are available: an asset purchase and a share purchase. Each approach comes with its own legal, financial, and tax implications, and understanding these differences is crucial for making an informed decision that aligns with the buyer’s goals. This blog post will explore the key distinctions between asset purchase and share purchase transactions in British Columbia.

Nature of the Transaction: An asset transaction involves the acquisition or divestment of certain or all of a company’s assets, which may include equipment, inventory, real property, contracts, or lease agreements. Some liabilities may still transfer due to successor liability rules, but the seller retains ownership of some of the operating entity. On the other hand, a share purchase involves acquiring shares or ownership interests of the target company, resulting in ownership of the entire business, including assets, liabilities, and obligations. The buyer inherits all existing liabilities and risks associated with the business, even those not immediately apparent.

Liabilities and Risk: With an asset purchase, the buyer has more control over the liabilities they assume, leaving behind unwanted debts with the seller. However, certain liabilities may still transfer due to certain legislation. In a share purchase, the buyer assumes all existing liabilities and risks, including known and unknown ones, like pending lawsuits and tax obligations. If the business being purchased carries substantial potential for unknown liability claims, such as product liability, professional negligence, or environmental hazards, it may strongly indicate the necessity of opting for an asset purchase.

Contracts and Permits: In an asset purchase, the buyer usually negotiates or obtains new contracts, licenses, and permits to continue business operations, as existing agreements do not automatically transfer. On the other hand, in a share purchase, existing contracts and permits typically remain in force since the legal entity remains unchanged, avoiding the need for extensive renegotiations. This can be beneficial as in most cases it allows the buyer to continue business operations without the need for extensive renegotiations or obtaining new approvals.

Tax Implications: The choice between a share acquisition or asset acquisition becomes more complex due to the inherent conflict between the interests of the vendor and purchaser regarding income tax considerations. Typically, buyers prefer asset purchases as it provides a cost base for certain assets which can be depreciated. On the other hand, sellers prefer share purchases as it may result in preferential tax treatment, treating the sale proceeds as capital gains. Resolving this conflict becomes a matter of negotiation.

Due Diligence: Share purchase due diligence is broader and more encompassing, as it involves assessing the entire target company and assuming all its liabilities. On the other hand, asset purchase due diligence is more focused, as it centers on the specific assets to be acquired and allows for more control over the liabilities taken on by the purchaser.

Transfer of Employees: In an asset purchase, employment contracts do not automatically transfer to the buyer. While the asset purchase allows for a selective assembly of the workforce, certain obligations, such as length of service for severance pay, may still transfer. On the other hand, in a share purchase, the purchaser inherits the entire workforce and all severance obligations to employees, significantly impacting future plans for downsizing or integration.

Conveyancing Costs: Transferring shares is simpler than completing an asset transfer. Share transfers involve limited conveyance documents, while asset transfers require an extensive set of documents and potential third-party consents. Asset transfers may also incur significant registration costs and Property Transfer Tax. Share purchases may have to deal with contracts with third parties that contain restrictions on a change in control.

Want to know more?

What Are Usual Or Typical Conditions Precedent That a Purchaser Would Want in an Asset Purchase Agreement? 

What Are Usual Or Typical Conditions Precedent That a Purchaser Would Want in a Share Purchase Agreement?

 

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Understanding the Usual Terms for a Letter of Intent in British Columbia Business Purchase

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Introduction:

A letter of intent (LOI) is a valuable tool for parties seeking to assess their initial agreement on significant business terms before diving into formal purchase and sale negotiations. Acting as “term sheets,” a LOI streamlines the creation of final binding agreements.

Common LOI Terms

Parties: Clearly identify the involved parties accurately, providing their full legal names and addresses, ensuring the document’s legality and a strong foundation for negotiations. Additionally, the LOI should identify any rights that are assignable to a third party.

Purchase Price: Outline the purchase price, either as a fixed figure or within a negotiable range, along with payment method and timing details. Additionally, the sellers may often require purchasers to make a deposit towards the purchase price.

Assets and Liabilities: Clearly specify the assets and liabilities to be included in the purchase to avoid any misunderstandings during negotiations.

Due Diligence: Grant the buyer the right to conduct due diligence on the business to ensure transparency and assess viability.

Exclusivity: Consider an exclusivity clause to commit both parties to negotiate exclusively during the specified period.

Important Dates: To ensure a smooth and efficient transaction, it is advisable to establish a well-defined timeline that outlines key dates for signing the purchase agreement, target closing date, and other critical milestones.

 

Non-Solicitation: The seller will aim to incorporate a binding clause in the letter of intent, preventing the buyer from soliciting or recruiting the seller’s employees if the transaction does not proceed. On the other hand, the buyer will seek to restrict the non-solicitation provision to enable hiring the seller’s employees through general job postings.

Confidentiality: Include a confidentiality clause to safeguard proprietary information exchanged during negotiations. Additionally, the confidentiality prevents employees from becoming preoccupied with the ramifications of the sale and maintains their loyalty.

Binding or Non-Binding Nature: Explicitly state whether any part of the LOI is binding on the parties.

Termination: Address conditions for termination, such as mutual agreement or failure to reach a definitive agreement.

Conclusion

The LOI sets the stage for negotiations when purchasing a business in British Columbia. By outlining key terms and conditions, buyers and sellers establish a framework for discussions and ensure a smooth and transparent transaction process.

 

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What are standard conditions that a Purchaser of a vacant residential lot may want in a contract where they intend to build a home?

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This article will explore the conditions that a Purchaser may want to consider when buying a vacant residential lot in British Columbia.

  1. Due Diligence Period: One of the first conditions that should be included in the purchase contract is a broad due diligence period. This allows the Purchaser to conduct thorough investigations into the property before finalizing the purchase. The Purchaser may look into the implications of the Speculation and Vacancy Tax if they plan on leaving the lot vacant for a period of time prior to building. Another consideration is to assess whether the transaction will be subject to the Goods and Services Tax (GST). Further, the Purchaser may want to determine whether the property is subject to a Heritage Designation, or archaeological site. It may be prudent to conduct environmental and engineering assessments of the property prior to purchasing it. A Purchaser may want to consult with the City or Municipality to determine the size or siting of a future residence intended for the property. The Purchaser may want to consult with Geotechnical engineers on potential construction issues and soil testing. Lastly, a Purchaser may want to inquire about available utility services, such as sewer, water, hydro and gas.
  2. Zoning and Land Use: Verifying the zoning regulations and land use designation is necessary to ensure you can build your dream home. The Purchaser must ensure that the lot is zoned appropriately for residential use and that it aligns with their building plans. Additionally, checking for any building restrictions or design guidelines imposed by local authorities or homeowner’s association helps protect the Purchaser’s interests.
  3. Buyer Financing: Including a financing clause in the contract allows the Purchaser to withdraw if they are unable to obtain satisfactory mortgage financing within a specified timeframe. This condition is essential as it ensures that the Purchaser is not obligated to proceed with the purchase of the home if their financing falls through.
  4. Review of Title: This condition allows the Purchaser to perform a review of the land title to address the potential encumbrances on the land. These could include covenants, liens, easements, and statutory building schemes. A thorough review of the title is essential to ensure that the property meets the Purchaser’s needs.

It is critical to make sure that you understand any restrictions on the zoning of your property, as well as the property itself to ensure that you don’t lose thousands, or end up in a lawsuit for demolishing a heritage-designated and protected home. A little bit of effort can make all the difference. Call Heath Law if you’re purchasing a residential property lot on Vancouver Island.

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A Seller’s Guide: Completing Real Estate Transactions in Nanaimo

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Completing a real estate transaction as a Seller in Nanaimo involves various steps and considerations. The Buyer’s lawyer prepares almost all of the documents in a real estate transaction. The Seller’s lawyer will review the agreement of purchase and sale as well as the remainder of the transaction documents to ensure the Seller’s interests are protected. This article will provide a concise guide outlining the standard procedures after there is a contract of purchase in place and the conditions have been satisfied.

  1. Deposit: Once the conditions have been satisfied, the Buyer will provide the remaining deposit required under the purchase contract, if any. The deposit is typically held in trust by the Realtors until completion.  
  2. Document Execution: The Buyer’s lawyer will prepare and forward to the Seller’s lawyer a set of documents that must be signed by the Seller. Once signed, the documents are returned to the Buyer’s lawyer. The Seller’s lawyer must provide the Buyer’s lawyer with an undertaking to clear from the title any financial charges or encumbrances, such as a mortgage or lien.
  3. Completion: The funds provided by the Buyer are first used to pay out the Seller’s existing mortgage, outstanding taxes, and other encumbrances on title that must be cleared. Once the Seller’s lawyer completes their undertakings, the remaining funds are transferred to the Seller. The Realtor’s commission is usually paid by the Buyers and deducted from the monies due to the Seller.
  4. Possession: The date of possession is often the day after completion. The Realtors exchange keys, transferring possession to the Buyer.

Discharging Mortgage: Once the existing mortgage has been paid out, the Mortgage Lender will either file a Discharge of Mortgage with the Land Titles Office or forward the Seller’s lawyer a signed Discharge of Mortgage to be filed with the Land Titles Office.

Did you know: Sellers are as at-risk of being taken advantage of as home buyers? Don’t be left with costs that should be incurred by the purchaser or lose a good deal because you didn’t have a lawyer experienced in local real estate backing you. Contact Heath Law today.

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The Advantages and Disadvantages of Arbitration Clauses

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Introduction:

 

Arbitration has become a popular alternative to court proceedings for resolving disputes. It offers a range of benefits, including privacy, informality, and efficiency, making it an attractive option for many businesses. However, like any legal process, it also has its downsides. This article will explore the advantages and disadvantages of arbitration clauses to help you make an informed decision when choosing this method for dispute resolution.

 

Advantages

 

Privacy and Confidentiality:

One of the main reasons for the inclusion of an arbitration clause in contracts is the ability to keep the proceedings private. Unlike court proceedings, where documents are public and hearings are open, arbitration takes place behind closed doors, shielding the parties from public scrutiny. This confidentiality enables the parties to argue their case without fear of reputational damage, which can be critical for maintaining a positive business image.

 

Informality and Speed:

Arbitration offers a more informal process compared to court proceedings. The rules of procedure and evidence before an arbitrator are more relaxed, providing a less rigid and intimidating atmosphere. Additionally, arbitration is typically much faster, allowing cases to be resolved in a matter of months, whereas court cases can drag on for years due to backlogs in the legal system.

 

Specialized Decision-Maker:

In arbitration, parties have the advantage of selecting an arbitrator with specialized knowledge and expertise in the area of law relevant to their case. This is in contrast to the court system, where judges are assigned randomly and may lack experience in specific legal fields. The ability to choose a knowledgeable decision-maker can lead to more informed and fair judgments.

 

Cost Flexibility:

Arbitration offers flexibility in cost allocation. Parties can negotiate who pays for the arbitrator’s fees, the venue, and the legal fees of the winning party. Moreover, by avoiding complex legal procedures like discovery, which occurs in court, parties can limit their overall costs. However, it is worth noting that the availability of qualified arbitrators on Vancouver Island and the potential high costs may be a drawback.

 

Disadvantages:

 

Limited Discovery:

One significant drawback of arbitration is the limited discovery process. Unlike court proceedings, arbitration may not allow for an extensive exchange of information about witnesses and evidence before a trial. This can make it challenging to gather sufficient evidence to prove a party’s position.

 

Finality of Decisions:

Perhaps the most significant downside of arbitration is the limited avenue for appeal. Once an arbitrator renders a decision, it is usually final and binding on both parties. In contrast, court decisions can often be appealed to higher courts. This finality can leave parties with little recourse if they believe the arbitrator made a mistake.

 

Conclusion:

 

Arbitration offers several advantages that can be highly beneficial in resolving disputes. It provides privacy, efficiency, and the ability to choose a specialized decision-maker. However, it also comes with its drawbacks, such as limited discovery and the finality of decisions. Before including arbitration clauses in contracts, it is crucial for parties to carefully consider their specific needs and preferences, seeking legal advice to ensure the chosen method aligns with their goals.

 

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A Buyer’s Guide: Completing Real Estate Transactions in Nanaimo.

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Completing a real estate transaction as a Buyer can be a complex process. Once the Buyer and Seller have a contract of purchase and sale in place and the conditions have been satisfied, the Buyer’s lawyer will conduct a land title search and review any charges on the title. The Buyer’s lawyer will also prepare the conveyancing documents, and coordinate signatures, registration and money transfers.

  1. Completing the Purchase of Sale: The Buyer’s lawyer prepares almost all of the documents in a real estate transaction in Nanaimo. These include conveyancing documents, mortgage documents (if any), land title searches, and a statement of adjustments. Any financial charges on title are to be discharged by the Seller.
  2. Prior to Closing: The Buyer’s lawyer meets with the Buyer prior to closing to review the entire transaction and sign the documents. The transfer documents are sent to the Seller’s lawyer to be executed by the Seller. The documents are then returned to the Buyer’s lawyer. Once the Buyer’s lawyer has received the down payment from the Buyer, and the Buyer has satisfied all conditions of the mortgage lender, the lawyer registers the land title transfer document, along with the mortgage document at the Land Title Office.
  3. Closing: Once the documents are registered and the Buyer’s lawyer receives the mortgage proceeds, then the down payment and mortgage proceeds are paid to the Seller’s lawyer. Often, the Buyer takes possession the next day after closing.
  4. Post-Closing: The Buyer’s lawyer will provide a final reporting letter to the Buyer once the state of title certificate is received from the Land Title Office and will also provide the state of title certificate to the Mortgagee.

Don’t let the above steps in the real estate process fool you with their seeming simplicity. These four steps each have their own complexity in the home buying and selling process and missing the wrong step can cost you thousands of dollars, or even the sale of your desired property. Be certain you’ve done everything right. Contact an experienced real estate lawyer at Heath Law, in Nanaimo BC.

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