Strategies for buying or selling a business in 2021

Rachel:    Welcome, everyone. Hello. Good morning or good afternoon from whatever side of the country you're coming to us on. Welcome to our webinar; Strategies for Buying or Selling a Business in 2021. My name is Rachel Gervais, and I am a tax partner with BDO Canada in our downtown Toronto office, and I'm also the Tax Service Line Leader with part of the executive leadership team covering the Greater Toronto Area of Canada. BDO Canada, and Gowling WLG, are your co-hosts today. We are co-hosting partly because of our great relationship between the two firms and also because of our great success from our work together as co-authors of the bestselling Canadian tax foundation book, 'The Taxation of Private Corporations and Their Shareholders'. Now let me introduce you to our expert panelists today. 

We have my partner, David Elrick, a tax partner specializing in buying and selling transactions in the private company space, from our Winnipeg office. We have Anita Yuk, tax lawyer, based in Gowling's Vancouver office. David Stevens, tax lawyer and partner, in Gowling's Toronto office and David Stevens and I go way back on the book that we co-authored and co-edited. Of course, not last and not least, we have Ryan Farkas, transaction advisory services partner and corporate finance leader, based in Toronto at BDO Canada. Our panelists, a number of them, also happen to be the co-authors of a specific chapter in this fine book. Chapter 16, which covered the tax considerations of buying and selling a business. So we are excited to bring you this expert group of speakers today. 

So let's turn to our agenda. What are we going to be covering in this hour that we have together. We will begin with a brief update on the state of today's market as it relates to our topic. We will address the impact of the pandemic because it certainly has had some impact. Then we will discuss key legal tax and corporate finance considerations when selling a business. Then we'll move to the topic of buying a business. We would love for this to be an interactive and informative session for all of our participants and our registrants. So please do use the Q&A function, that Calvin outlined to you on the platform, and we will do our very best at the end of this session to cover as many questions as we can. We've also received a number of great questions through the registration process and we will weave those in to our conversation. 

So a few sound bites about today's market to set the stage for our discussion. We know that the market remains strong overall and we have seen lots of transaction volume, in particular, since Q4 in 2020. We know that certain industries have had increased activity, in particular, health care and technology. We've seen lots of liquidity on both company balance sheets as well as from US private equity and that's continuing to drive transaction volume. We know that banks are also starting to be more aggressive after they needed to take that necessary pause in Q2 and Q3 of 2020. Overall, it's a seller's market and there are not enough assets in play. This is leading to a very stable valuations and earning multiples despite the volatility in the markets. We also see that for companies that have had an impact from COVID on their performance, buyers are being creative, and they're finding ways to bridge those value gaps with differed compensation and earn-outs and vendor notes. Things that we'll talk a little bit today. So, overall, we know we have a strong market. We're going to turn our attention now to the specific focus on selling a business. We know that there are many reasons a business owner might decide it's time to sell. Maybe they've been approached unexpectedly by an unexpected potential buyer. Maybe they don't have a succession plan and the know it's time to get out. Or maybe it's just simply time to retire. It's possible that COVID has fast tracked some of these ideas or considerations. So over the next segment our panelists are going to share their wealth knowledge for key considerations before, during and after a sale transaction. David Elrick, let's start with you and then perhaps Ryan can add some colour. 

David E:    Thanks, Rachel. First I'll mention some assumptions we've used for purposes of the presentation today. So we're assuming the sale of the business which was arms length person. The business being sold is a Canadian controlled private corporation and that the vendor's Canadian. If this doesn't perfectly line up with your facts most of what we say today will still apply to you. There'll just be certain areas that won't. Pre-sale can comprise a wide range of time. Ideally you start planning well ahead of a potential sale. 2 to 5 years or even more. The sooner you start the more flexibility you have with your planning. Today we're mostly going to focus on the 6 to 12 months before a sale so we won't spend too much time talking about longer term planning strategies. One of the most important factors in sales is often the capital gains exemption. It's one of the few great tax breaks that's still in the Income Tax Act that the government hasn't taken away yet. I guess I should add that there's no indication that they're going to take it away. What is the capital gains exemption? It allows you to claim the exemption on capital gains up to $890,000.00 when you sell shares of your private company. So what is that worth? That's worth tax savings about $225,000.00, if you're making the full claim. What does it take to qualify? You must sell shares as CCPC. These assets are used principally in an active business carried on primarily in Canada. You must have held those shares for at least 2 years. So one of the important parts here is you must meet certain of these test in the 2 years prior to sale. Most notably at least 50% of the assets need to be used in an active business carried on primarily in Canada. So, again, the assets need to be active. So if you have say a rental property, or you have just investment assets built up in there, those wouldn't qualify. Also if you have foreign assets. So whether if you directly own foreign assets inside your operating company, or if your operating company owned shares of a foreign subsidiary, those would be non-qualifying assets for purposes of these tests. There's really two tests. In the prior 2 years it's a 50% test so at least 50% of the assets need to be active assets used in Canada. Again, this is why planning ahead of time is important, because if you don't meet that 50% test there's nothing you can do other than purify the company, and then wait another 2 years before you sell. At the time of sale this test becomes more stringent. So at the moment of sale it's actually a 90% test instead of a 50% test, however, the positive side there is it's only at the very moment of sale. So if you're offside of the 90% test there's planning we can do to clean things up prior to selling. 

An other issue is you want to ensure all your tax filings are up to date. Make sure there's no skeletons in the closet. As part of the share purchase the purchaser will do due diligence on your company. They'll examine all your tax filings, look for issues. A trend that's popular in Europe, starting to take off in the US and has come to Canada as well, is the vendor's doing due diligence on themselves prior to selling. What that does is a couple of things. It finds all the issues before they pop up, so you'll know what the purchaser is going to encounter, and then you can proactively deal with those before you put the company up for sale. The other thing it can do is potentially speed up the purchase process. Again, I've been involved in some where the vendor does the due diligence on themselves and then releases that report to potential purchasers and that speeds up the purchase process. Ryan, aside from having the right tax plan in place, what would be the most important thing to consider as someone starts planning for a transaction?

Ryan: Thanks, David, and certainly I would echo some of those thoughts just around one of the trends we are seeing is vendor diligence, both from a tax and a financial perspective, which is vendors doing more work in advance of even going to market. I always use the analogy of doing the home inspection and providing it to buyers as they kind of walk up to the house instead of letting them find issues on their own. So that's certainly something we're seeing. While I may be the only non-tax professional on the panel I would absolutely reiterate as well the importance of tax planning. It's always a shame when as an M&A advisor we get brought into a process and ultimately, as the vendor kind of looks at their tax plan and that you have the feel ... momentum that we uncover that there were opportunities, because the trust wasn't set up or, again, as David was talking about the CCPC, they don't meet that exemption and often it can result in hundreds of thousands or millions of dollars of leakage from, a tax perspective, and obviously the benefit of a tax claim is you don't need to negotiate that value. The buyer's writing the same cheque which makes it an easy way should, again, those options be available for you to build value in terms of what an owner puts in their pocket. Outside of tax I think that, in my mind, when an owner starts to think about a transaction the focus should be on understanding the deal process, their personal objectives and how those are going to come together around what the market has to offer in terms of a deal. So owners of successful businesses, by definition, they are fantastic operators. They built a business, whether it's over a number of years, whether it's a number of decades, but just because they're successful operators doesn't always mean that they have, depending on their background, significant experience in terms of navigating through a transaction. This conflict, when you overlay in the emotional impact of you're transitioning the legacy of the business you built, can often create issues as you move through a transaction. Now, those issues can be easily mitigated by what we're talking about right now which is by preparing appropriately for that transaction. 

So how do you prepare? In my mind the easiest way to do that is to put the right team around you. Giving thought, as you think about a transaction and what it might mean to you, around who your M&A advisor. We obviously talked about, for a tax perspective, the legal team that you're going to put around you. The wealth team for post-transaction in terms of as you move to the next evolution of trying to where those proceeds might go. Having those conversations and having that team as well as some owners choose to involve other stakeholders. It might be to help them navigate decision making, whether it's somebody, a former business owner or a fellow business owner who's gone through a process. So we encounter scenarios all the time where, again, an owner has been really thoughtful around putting a team around them that can help them make the best decisions. And really, that team gets challenged with providing the best information to that owner, and that's really my focus as an M&A advisor is giving that owner the best information, at every given point, to make the best decisions. No two transactions, no two situations, are the exact same. Every company has different characteristics. Shareholders have different objectives and the market is constantly evolving in terms of what the market will yield. Today is not what deals looked like 2 years ago. That existed well before we knew of COVID-19 and any impact it might have on deals. Again, it's constantly evolving. So therefore no size fits all. No transaction strategy kind of works for every owner. One thing I constantly see is that owners are often surprised with the different strategies that you can use today. It's obviously helped them achieve their objectives. So maybe to give you a quick sense, on one transaction we might be helping a vendor negotiate with one specific strategic buyer that has approached them, and you can extract great results. In another scenario you might actually help an owner, again, up to years before close prepare for and execute on a structured auction process where you might talk to 200 buyers. So ultimately both of those strategies can achieve an objective in a given scenario but there's obviously a big difference in terms of how you go about executing on both of those. The reality is, is that for many owners the right process is somewhere in between those extremes. 

So ultimately what are some high level questions that, again, I think an owner should ask the team that they put around them? They would be the following. What are you interested in selling? Selling 20% of the business is much different than selling 60% or 100%, but they all exist in the market today as opportunities for some businesses, and really understanding the pros and cons and ultimately the impact on strategy and value that any of those scenarios might have is critical. What is the business worth? It seems like a simple question but when you start to factor in the other decisions around strategy, that you make as it relates to a deal, they all may have an impact on value so talking through that with your team is critical. What form of consideration is desired? Cash at close. Deferred consideration mechanisms such as earn-outs, vendor take-back notes. Perhaps shares in some context. Ultimately there's different ways to be paid. A ten million dollar deal can look very different in one scenario versus a ten million dollar deal in a different scenario. So ultimately understanding and thinking through what a fit is for you? Where is the flexibility? That becomes really important because ultimately, specifically in the private mid-market where we spend most of our time, most transactions are not 100% cash at close. So what does that mean for you as an owner? How does that fit into your wealth plan and liquidity needs that you may have? Those are, again, things that you don't want to be figuring out on the fly when presented with an offer by a potential buyer. Lastly, what are the qualitative things that are important to you? Sometimes money and structure are some of the simpler items. What is the legacy of the business? What do you want to see from a partner or an acquirer? What does your transition plan look like? What do your employees look like? It's a really flushing out, those types of items before you're too far down the path with a perspective buyer, it's really important. Ultimately I think what I would leave you with is that a good transaction team, encapsulating all those disciplines, is going to walk you through those items, the implication on strategy, timeline and value, and that allows you to position yourself to develop and then execute on the right plan with the best outcome. So maybe I'll pass it over to David Stevens to talk about some legal considerations. 

Anita: Thanks, Ryan. As Ryan mentioned, preparation and getting clear on your objectives are key to an efficient transaction. To help with that we usually recommend the parties start by setting out the key business points in a term sheet. So usually the parties will agree that most terms in a term sheet are non-binding. They'll provide for an exclusivity period, and confidentiality, and maybe even a break fee. Even if the term sheet is non-binding we recommend that sellers engage their advisors early to make sure they're not giving up too many rights and too much early on. When something is on the table it's often hard to walk back. Something else to lookout for during the LOI stage, as a seller, is if you're working with a non-resident buyer. The company will lose it's CCPC status upon the signing of a legally binding agreement for the transfer of shares. As David Elrick mentioned, CCPC status is key to assessing the lifetime capital gains deduction. So there will also be an acquisition of control no matter who the buyers are. Either at closing of the transaction or signing of the binding agreement. So make sure you want to keep that in mind. David Stevens, I'll let you tell us a bit about getting us ready for due diligence as a seller. 

David S:    Well, it's already been said, Anita, in David's presentation and Ryan's presentation, that it's a very good idea for the seller to think about due diligence in advance. Obviously that's something that the buyer's going to look very closely at and the seller would be well positioned to look at it closely first. So one thing you want to do is you want to review all of your material contracts and you want to look to see whether there are change of control provisions in those contracts, exclusivity arrangements, confidentiality arrangements, consents required for assignments of various contracts, various things like that in those contracts. Actually there's artificial intelligence software, if you have a large number of such contracts, we can put them through our computer program to identify those key terms. You want to see those in advance because that's going to affect the negotiation of your deal with the buyer. We're also going to want to look at your licences, your permits, your registrations, your certificates, things like that that affect ownership or affect the qualify of ownership of various assets and making sure that all of them are up to date. The status is appropriate. You're in compliance with relevant government regulations in regard to those types of things. Same thing with title to land.  You probably want to check that to make sure that you own the property and is properly titled and your employment contracts, your employee contracts. What are you relationships with your employees? So you want to do that review in advance. You'll likely want to put that information together in a computerized form so that it can end up in a data room. As you organize you'll want to make sure that all those things are properly named in the data room. So that's the home inspection metaphor that Ryan used in his discussion. You're getting that ready, in advance, for the buyer and it's in a data room and the buyer, not only has your report, but has proof of your report in the data room. You want to look at also, on a share sale, whether there are any problem assets in the corporation that shouldn't be sold or you don't want to sell. So one principle example is life insurance. It's not likely that the life insurance on the key shareholders of the corporation you're selling should stay with that corporation on the share sale. So look at that. Look at the assets. What assets need to be removed and that brings me to the last point. After all of that work you may want to think through whether there should be some sort of restructuring that's necessary. David mentioned the capital gains exemption. That's the principle one. There's planning that can be done to access the capital gains exemption, which should be done 2 years out, and also on the eve of the sale. But there's other restructuring considerations that you may want to consider prior to going to market. I'll stop there and ask David Elrick, now we've dealt with the pre-sale considerations, David, can you take us through some of the tax considerations on the transaction itself? 

David E:    Sure. Thanks, David Stevens. The first big thing that will come up is really the form of the transaction, and that is, is it going to be a sale of shares or a sale of assets? Many sellers are very focused on trying to claim the capital gains exemption, which I discussed earlier, given the large potential tax savings. So this means they're often looking for a share sale as you can't claim it on an asset sale. Aside from the capital gains exemption, tax payment selling shares will also be less than selling assets and flowing out the proceeds as dividends. So even forgetting about the capital gains exemption for a moment it still, tax wise, be preferential generally for a share sale as opposed to an asset sale. So that's why sellers are generally focused on that side. Unfortunately purchasers often prefer to purchase assets. So the form of the sale often becomes a point of negotiation. One of the main reasons purchasers prefer to purchase assets is it can increase the cost base of those assets that they purchase. For example, if the purchaser buys the shares of a company and that company has ten million dollars of internally generated goodwill, there's no tax asset there. However, if they buy the assets of that same company, they then have a ten million dollar asset with respect to that goodwill, they could depreciate it 5% per year. So this'll give them a five hundred thousand dollar tax deduction per year. So you can see where that would be a pretty advantageous if the purchaser wanting you to prefer that. My advice regarding this is set the expectation up front. So, again, if you want a share sale make sure you're really clear about that up front. Anita talked about getting assistance with the term sheet. Make sure you get professional advice right up front. Don't go signing or creating term sheets before you get some professional advice. This is one of the key aspects that you want in that term sheet because it'll be difficult to change it later. You certainly can but then it's going to cost you money, money as in purchase price money, to change it later on. So, again, you want that key. Is it going to be an asset sale or share sale? You want that to go in that first term sheet. Depending on the particular transaction, sometimes it's an asset sale or share sale without a lot of back and forth, other times some type of negotiation takes place. For example, the purchaser may agree to the share sale if the price is reduced to make them whole. So I've seen that before. We say okay, reduce the purchase price. I'm okay doing that in a share sale. Or other times I've seen them split the tax savings from switching to a share sale. So there's different ways it can take. 

There is also a kind of third option and that is to do a hybrid sale. So which means you end up doing an asset sale and a share sale. So it's a way of giving both parties, both the vendor and purchaser, kind of what they want. The vendor is getting the share sale they want and the purchaser is getting the asset sale they want. It generally won't work out quite as well for the vendor as a pure share sale. Just the way it gets structured and the tax they pay but it gets them a lot closer than an asset sale. It does add some complexity to the deal. Your lawyers are going to have to draft two different agreements because you have an asset sale and a share sale. So it adds a little bit of complexity to the deal, for sure, but that's also a valid option. Anita, perhaps you can discuss some of the other important legal considerations related to a share sale and asset sale. 

Anita: Sure. Thanks, David Elrick. As David Elrick already talked about, the lifetime capital gains deduction and the difference in ongoing liability, often make a share sale attractive to sellers. Contingent or just possible potential liabilities are sometimes the bigger negotiation roadblock. Buyers are going to try to get as much comfort as possible with generous indemnities or holdbacks. But remember that as a seller you are selling your business and will therefore have no more control over future events that can affect these potential or contingent liabilities. So you might be a motivated seller and want to be cooperative with the buyer but make sure you're protected as well. Keep in mind, as Rachel mentioned earlier, that the general environment right now is a seller's market. 

As for an asset sale, it's just the property of the company that is moving, so if someone makes a claim after the closing of the transaction against the company it's still the company's problem, only now the company has no assets. That can leave the company in a vulnerable position. The seller should also keep in mind that a buyer who is a non-Canadian, so if you're working with a non-Canadian buyer which includes Canadian companies controlled by non-Canadians for the purposes of the Investment Canada Act, will need to comply with those notification provisions in that act. The Investment Canada notification will need to be completed by the buyer. So it's not a seller's obligation, per se, but sometimes it can cause delays, especially if the notification is done pre-closing, and at extreme cases the transaction could be refused. So, David Stevens, I'll let you discuss the other key considerations related to a sale. 

David S:    There's a couple of things from a corporate perspective on an asset sale. It's management that's going to be in charge, largely, negotiating the transaction. But you're going to obviously need the board of directors to approve the transaction and you want to think carefully through what kind of approval is required by the board. Sometimes if the corporation in an asset sale is selling all, or substantially all, of the assets you actually require shareholder approval. So you'd have to look at that, and who your shareholders, are and make sure that they're available to sign or they agree with the transaction, the sale of the business. Oddly, strangely, we've talked about due diligence that the buyer is going to do on the seller and we went through how the seller might prepare for that due diligence, but the seller also wants to do some due diligence on the buyer as well. Frequently you'll see the seller requiring the counsel for the buyer providing an opinion with respect to certain aspects of the buyer's eligibility to purchase the business. It's an obvious point for the seller's counsel to opine that the seller exists as a matter of corporate law but there are other ones, going back to Ryan's point about the qualitative aspects of the deal, does the seller actually have the capacity to carry on the business? Will they be able to get the permits that are required? That sort of thing. So you want to think through who your buyer is and you may want a buyer's counsel opinion supporting certain points on that arrangement. On a share sale you're going to be making promises in the share purchase agreement. We'll come back to that and look at that from the buyer's perspective but all that due diligence that we talked about is going to end up as representations and warranties and indemnities in the share purchase agreement. So you want to look at those carefully and see what your exposure. We'll come back to that when we look at the same point from the seller's perspective. Finally, you're going to want to look at payment terms, security for payment and then closing conditions, time in terms of closing. So, I'll stop there and we'll move onto the post-transaction aspects of the deal, and turn it back to Anita to start us off on that. 

Anita: Thanks, David Stevens. For the seller, the main thing to keep in mind is the deal doesn't stop with the cutting of the cheque. Often deals will include post-closing adjustments for working capital. So the seller may end up actually having to repay some of the proceeds from closing. It could involve earn-outs, and there will usually be reps and warranties and other covenants, like non-competition agreements, non-solicitation agreements that survive the closing and the seller will have to make sure that they stay on side for that. It could be several years. Finally, David Stevens, this is probably a good time, post-transaction, for the seller to evaluate whether there's an opportunity to do some planning. Did you want to talk about that a bit? 

David S:    I do. So, as Ryan who spoke about your team, one member of the team would be wealth advisors. So now your situation in terms of your wealth has changed drastically. You own a company that used to own a business. Or you own proceeds of disposition from the sale of shares. Either way you're liquid value before that probably affects your wealth planning dramatically. So you want to review your Wills. You want to review the trust that you have in place, and going forward now you're investing financial assets, how are your going to share those with children and grandchildren? Are there any income splitting opportunities through the use of trusts? So you probably want to look at that carefully, and actually you probably want to begin looking at that almost at the outset, because this is the ultimate destination is sitting with proceeds, either in the company because of a sale of assets, or in your pocket because of a sale of shares. You probably want to look at that structure, what that structure should be, towards the outset because there may be things you should do prior to selling to anticipate your wealth planning in the end. I'll stop there and I think at this stage we're finished with selling a business. I think Rachel is just going to provide us with a summary of selling a business. Is that correct, Rachel? 

Rachel: That's right, David Stevens. Thank you very much. It was amazing expert advice from each of our panelists. Lots to unpack there. We heard some very, very key takeaways though. If I think about some of the key considerations and some experience that I've had even in my practicing space. We heard about planning well in advance and, if it al possible, at least 2 years from a tax perspective. There's so much more that can be done, the further ahead you are in the game, when you're looking at selling a business. We know that we need to have the right team of accountants, legal, M&A and corporate finance professionals working on the deal and as early as possible in the planning stages as well. So have those experts early. We heard about the home inspection. I think Ryan referred to it as a home inspection. The pre-selling vendor due diligence that can be done. It really, really helps expedite the process and to sort of be in advance of you know what's going to come at you when you get into that due diligence phase, from a buyer's perspective. Then also thinking about the wealth advisory side of the equation. As an owner that's looking to sell, the type of asset that you're going to have, is going to be very different post-transaction and very likely very liquid, and having the right wealth advisors working through what that's going to look like for you well in advance. To make sure that you're able to live the lifestyle that you're looking for post transaction. So some great, great advice from all of our experts on the selling a business angle. So now we're going to flip our attention a little bit and we're going to focus specifically on things that a buyer should be aware of. What are some of the key considerations for a buyer? So, Ryan, let's start with you. If a company is contemplating  inorganic growth, so they're looking to make an acquisition, what are some of the key considerations and things that they need to contemplate? And then we'll pass to Anita and David Stevens and they can share their legal lens on that topic. 

Ryan: Thanks, Rachel. Absolutely and this is a scenario that kind of happens often especially in a ... fairly low organic growth with many industries that companies and owners look to how complimentary an inorganic growth strategy can be. I think that I would say is that successful acquirers have are persistent and, again, they create kind of an infrastructure around the process. Most companies can describe the perfect fit, but one thing that's really important as you think about your strategy of identifying and contacting targets, is really to find the balance between your target criteria and alignment with your broader company strategy, but not falling into the trap of being fixated on finding the perfect deal. Whenever we work with buyers and through that process we really encourage them to think about the various criteria in that. Binary versus things were there is flexibility. So sometimes, as an example, from a binary characteristic perspective, you might be a unionized or a non-union organization and therefore you can't go to the other side. That's something that is tough to find a compromise on. It doesn't matter how many other things line up. That might be a binary criteria for you. Geography might be binary. But there might be many other criteria that whether it's customer based, whether it's size, number of employees, revenue, profitability that you might have a perfect idea in your head as an owner, but ultimately if you have a little bit of flexibility that becomes important because you open up the potential for broader targets. There is a numbers game element to is. Successful acquisition programs are a combination of sustained effort and sometimes a bit of luck. You only need one target to transact that's a good fit but the more targets that you can identify, and the more relationships that you're able to cultivate, that becomes critical over the long term in terms of being able to incorporate that into your strategy. The importance of timing is real. So sometimes you might have, again, the right target, and some nice alignment, and the right vendor but the wrong time. So the more that as a group that's interested in perhaps acquiring that you cultivate some of those relationships. A year from now, 2 years from now, that owner, when they have the mindset that they're ready to sell you will be on the list, or they will call you and perhaps even on a proprietary basis. We certainly see that when we're working with vendors. One of the first things they do when we sit down with them is the say here are the three companies that have called me that we know are interested in. They should be right at the top of the list. As an acquirer, I think it's really important to think about that strategy, identify targets, create a process and then soon they, it's similar on the selling side, they have some of that infrastructure in place. So give some thought to how are you going to finance the transaction. Is your bank been brought into the fold in terms of would they support something like that? Is your team able to take upon those themselves, those incremental responsibilities on top of day to day roles that they might have? That really allows you to seize an opportunity when it arises and you'll be able to get a deal done. Anita, what are some of your thoughts on legal considerations for buyers in that planning stage? 

Anita: Thanks, Ryan. As we talked about, for buyers, tax due diligence is important. The point of doing due diligence is not necessarily to kill your deal. It's very rare that I've seen it but more often it's to know how to structure and frame the deal. So sorry, this file from the transaction is really putting yourself in a position for the acquisition. For example, are there any regulatory restrictions that you have to comply with to operate the business? How do you plan on financing the purchase? it's about researching what your seller should have in place so you conduct proper due diligence later on and to be very careful about the LOI. Same considerations as for seller. Don't commit too early or to bind without bringing in your advisors. I'll turn it to David Stevens to talk about structuring considerations pre-transaction. 

David S:    You do want to begin thinking about the structure of your holdings prior to going into the deal. Probably not much you can do in terms of putting a structure in place but there's thinking that can be done. You can anticipate the structure that will be required. You may or may not be able to decide early on whether you want an asset sale or a share sale but one way or the other it's going to affect your exposure to liability and if you want to put the assets, if it's an asset sale, in a separate entity. Then you're going to look at how does that fit with the rest of my structure, from a business point of view, but also from a tax point of view and a financing point of view. It doesn't hurt to sit down with your tax advisor early on in the process to say that you're interested in an acquisition and it's likely going to look like this or look like that. What sort of thinking should I be engaging in now in respect of the structure in anticipation of a transaction that may not occur for a year or two. You won't have time constraints in putting a structure in place except that you should think about it well prior to the transaction. That's the pre-transaction component. We'll move on to dealing with the transaction. Over to, I think, Ryan who is going to talk about the transaction stage. 

Ryan: Thanks, David. So as you move to the transaction stage, so ultimately the focus for a buyer turns to diligence. Is it possible to say simply diligence can be scary. It can be scary for a vendor. The list can seem endless depending on the type of deal, the type of buyer, legal diligence, operational diligence, tax diligence, financial diligence, IT, insurance, reputational. Again, there's a lot that can come at a vendor and so how does a buyer want to guide themselves through that period? It's really to hone in on where are the risk areas based on, again, the size the of the deal that you might be doing. Obviously diligence is going to be more expansive if it's an organization that you're looking at acquiring that's the same size as you versus something that's much smaller that you might have yet a little more leeway in terms of absorbing into your organization. Again, your knowledge of the business, how closely you are related commercially to them. All of those things will kind of guide the strategy but ultimately tailoring the plan that's appropriate, I think is critical because it is such a, and can be, such an invasive process for the member. Then tied to that, communication with the owner. What if the owner has advisors? It might be through them but ultimately ensuring that there's a clear plan around diligence. That you're sticking to that plan. You're maintaining the two way dialogue around what you're looking to do. While you do that is because building goodwill of leading up to and then in the early stages of diligence positions you better when you find real issues, and I think if everybody on the panel would say they've never seen a perfect diligence process where there was not one issue uncovered, there's always an issue. Ultimately do you have the goodwill in the relationship and the communication with that vendor to navigate through that issue? So that relationship piece becomes really important. Both in a diligence piece and then of course moving to post-transaction. So ultimately I think those are some really important things to think about and, David, what about you? David Elrick, what do you think from a tax perspective?

David E:    Just building off that comment about the diligence, if you're buying the shares of a company, the due diligence is very important. Specifically on tax due diligence. As you mentioned, there's always something. I always uncover something. You never see a perfect one where there's no issues. Really what that helps you do is understand your risks and other stuff that might be there when you're taking over the company. I haven't seen one, from the tax side, that actually killed the deal but there's often significant things come up and it can impact how the deal is done. So sometimes it makes its way into the sales and purchase agreement if there's significant tax risks or liabilities that can impact, again, some of the reps and warranties in the agreement. The other aspect it can impact even, again, in a more extreme case is the holdback. So I've had deals where there's some very significant tax risks that the purchaser was concerned about so some of the proceeds on the sale actually got held back, it was for almost 2 years, until one of the issues would become statute-barred for tax purposes. So the due diligence can impact the deal itself. Another aspect is vendors often undertake a bunch of tax planning steps prior to sale. So as the purchaser you need advice, through your side, to determine if that will impact the company after the fact. It may change some of the values, some of the tax values you think you're getting when you buy the shares, may not be there. Or it could impact the tax risk so it's important you get advice on that. If you're doing an asset sale you don't really need a tax due diligence but you do want to understand how the purchase price will be split between the types of assets, what your future tax deductions look like, your capital cost allowance, etcetera, so you can plan out your future tax flows, etcetera. So, Anita, from a legal perspective anything to add regarding the transaction stage? 

Anita: Yeah, thanks, David Elrick. So as you've already talked about tax due diligence as one of the key things it's very important. There's usually something that will come up. But legal due diligence is just as important. When doing due diligence it's important to keep in mind why are you buying the business? What's important to you about it? So you want those to guide your due diligence. For example, is it key employees? What are their contracts like? Material contracts, as David Stevens talked about, is another one. If material contracts keeps the business going, will those contracts continue if you buy the business and there's a change of control? Then, is there important IP that you want with the deal? What level of protection do you have with that? Who actually owns the IP? We've seen sometimes that a seller thinks that they have title to the IP but it turns out that it was actually another entity in the corporate group that had it. It was a historical assignment that wasn't probably registered. So a buyer will want to make sure that all of this is cleaned up before the closing of the transaction. Then you want to think about the searches that will help a buyer get a sense of what they're walking into. So the usual public searches included, again: CRA searches; employment branch searches; litigation; bankruptcy or bank act; environmental or title searches if the sale includes property; corporate searches; doing a review of the key contracts; any credit agreements that will survive the closing that the buyer will take on; minute book reviews, to make sure that your buying from and dealing with the person who actually has authority to sell you whatever is subject to the transaction. So, David Stevens, once a buyer has completed their due diligence what should they do with the information that they've uncovered? 

David S:    So now it'll be in the hands of the lawyers drafting the agreements, on both sides, and the agreements will be, depending on the complexity of the deal, could be quite long. The objective, on both sides, so on the buyer's side is a level of detail and clarity and certainty with respect to all the risks that we've been talking about. So we've been talking about tax risks, business risks, financing risks, legal risks. Going into this business, the share purchase agreement, or the asset purchase agreement is, depending on the complexity, can be 100 pages long and it address, in detail, all of those questions. So the seller will have disclosed in disclosure schedules risks and the seller will have made representations and warranties in the share purchase or asset purchase agreement with respect to these risks. The seller will be making indemnities with respect to picking up the cost of certain risks that materialize. So all of that, the buyer's counsel has to look at, very carefully, and the buyer has to be engaged in the detail of the agreement, because that's where the value is. That's how the risks ultimately get allocated. On a share sale you'll be looking at the reps/warranties and indemnities. On an asset sale the detail is more around what assets are being sold? What assets are not being or purchased? Being clear on that and being clear on that in schedules. The same thing goes with contracts, material contracts. Which ones are being assumed or assigned? Which ones are not being assumed or assigned? Some of the purchase price may be paid by assuming liabilities. The asset purchase agreement will be clear on which liabilities are being assumed and which are not. So the level of detail is very high. It's very important for the buyer to be focused on it because that's where the value is. I think now we're going to move on to the post-transaction phase and turn it over to David Elrick to talk about post-transaction considerations. 

David E:    Thanks, David Stevens. A number of items to consider post-close. On a share sale one important issue is who will be responsible for the final financial statements and tax return for the period up to the acquisition of control. Regardless of who's responsible for preparing and filing them, there'll be a something in the sales and purchase agreement that says the other party gets to review them and approve them before filing. So sometimes a certain party wants to maintain control of this process. The vendor may want to maintain control since they're responsible for any tax, the liabilities pre-closing is what this would include, also those statements go into the calculation of final working capital. So, again, they may want to control the process. The buyer may also want to control the process of the final financial statements and tax returns, as financial statements form the basis of their starting point from taking over that company. So you can see both sides. Depends on the deal but different sides sometimes want control of that process. Another post-close issue is the calculation of working capital. Since you won't know the amount of working capital until after the sale date, and the working capital's really just a current asset lists, your current liabilities, so again you really won't know what that is until after the fact. A set amount usually gets put into the sales and purchase agreement. You figure out what's a normal level for the company. Maybe that's three hundred thousand dollars so that's the amount that gets put into your sales and purchase agreement and then, to the extent the actual number is higher than that, additional proceeds get paid out for the purchase of the shares and if the number is lower, then the purchase price is decreased by that amount. So ideally you want to be pretty close with the final numbers. Nobody likes a big adjustment post-close but that's the important piece that goes in there. Another related post-closing item, it's been talked about a little bit here, is earn-out payments. So not all deals have earn-outs but some of them do. It's really important to have, when you go to assistance when drafting these, to make sure the earn-outs can operate how you expect so that, again, if the company does well and you're expecting good earn-outs, that you're getting to get paid what you're anticipating. So it's important to get a lot of good legal advice with the drafting of those earn-out agreements. Finally, if you're doing an asset sale one other thing to consider is payment to GST, land transfer tax, PST, if applicable, so those factors and making sure you're registered, again your purchasing company is registered, needs get considered. So, Anita, David Stevens, any legal considerations post-close? 

Anita: Yeah, thanks, David Elrick. In addition to what David Elrick's already talked about, the deal consideration specific to the transaction for a buyer are similar to what was discussed earlier for a seller. Same thing to keep in mind about making sure you're on side any post-closing covenants, any representations and warranties that the buyer made that survived the closing. David Stevens, would you say that the same planning opportunities exist for a buyer as well? 

David S:    I think so. Your considerations are maybe different depending on if your holdings have changed radically. Now you own something new. But it may be integrated into your business and therefore your safe planning is just fine because it was based on the previous structure that you had. So I think it's less of a consideration for the buyer of a business than it is for the seller. The seller has cash. The buyer now has a new business or another business. The other thing I think the buyer wants to pay attention to is back to the agreements. So the 100 page agreement it will have shifted risk to the seller but there will be financial caps and time limit on the extent to which the buyer can claim back against the seller in those agreements. So you want to pay attention to those. Look at what's going on, obviously, what's going on in the business. If you're disappointed by how things have turned out and you think that there might be something in the agreement to cover it, there likely is and is likely governed by a financial cap and a time limit cap. So you want to be alert to those possibilities and pursue your rights under the agreement if something happens. So I think that's it for the presentation. But maybe Rachel can provide us with a summary of buying a business. Back to Rachel.

Rachel:    Thank you very much, David Stevens, and again some absolutely amazing advice from our panelists. Again, lots to unpack on the buy theme as well, but some key themes and takeaways that I heard and have been experienced. So again, the need to plan ahead and to be strategic. We heard again about having the right team of advisors and our panelists talked a lot about things that often come up in due diligence phases. So the legal, financial and tax due diligence and the absolute importance of each of those components. As we know buying or selling a business can be some of the biggest decisions business owners face. They can be risky and they can be very messy if they're not planned or executed properly. We hope that you've heard some excellent advice today from our panel of experts. They've all got lots of experience in this space and I think they're real world experience has been very helpful for all of us today on the webinar. We're here to help you if you're interested in buying or selling, of course. We have just a few minutes left to cover just a couple of questions. There are a number of questions that have come in, in the registration process, and then there were also a number of great questions that have come in on the platform. So we're probably only going to have time for a question or two to each of our panelists. So that's fine. I want you to be rest assured that if you have a question that's been raised, and you've supplied your contact information, we will be in touch with you. So somebody from the team at either BDO or Gowling will be reaching out to you, to help you through the questions that you've posed, if we don't get a chance to cover them today. 

The very first question, with just a few minutes left so we've got about a minute per panelist, here we go. David Elrick, I'm going to send the first question to you. It's a question that came in in the pre-registration section which is a question that we get, as tax advisors, quite often. So the question that came was, if you're selling an operating company, and it's 100% owned by a holding company but you're not selling the shares of the holding company, does the sale qualify for the qualified small business corporation capital gains exemption? So, David, maybe you can share some comments there. 

David E:    Yes. That's a great question because it was actually asked multiple times. It comes up all the time. It's a very common structure that people have. So the short answer is claim the capital gains exemption. Only individual can claim it. A company can't claim it. In that type of structure the answer is you have to sell the holding company. It's easy if your holding company is empty. It's just a pure holding company. It holds the shares of an operating company, that's pretty simple and straightforward. If you've been using your holding company, maybe paying dividends up and now you have investments up there, it's a little more complicated because you'll need to move out those assets ahead of time. So there's planning that can be done with that. The bigger concern is depending on the amount of assets you've accumulated in there you may not meet the test we talked about, the 50% and the 90%. So some planning needs to be done ahead of time. So if you have that structure with assets in there, great time to talk to your advisor to try and clean that up a bit. 

Rachel:    That's great. Thank you, David Elrick. Okay, the next questions come in during the presentation. I'm going to put this one to Ryan Farkas. This is more of a post-transaction type of question, Ryan. So the question that's come in is, how often does a typical buyer in our recent buy and sell side environment do they require the owner to stay on after a transaction? So this is with respect to 100% disposition but they're looking for that kind of key stakeholder/shareholder to stay on and support the transition. So what kind of time ranges are you seeing, Ryan, in the market place today? 

Ryan: It's an excellent question, Rachel, and certainly something that we kind of encounter on review. I think that it does depend and why does it depend? It depends on the buyer and of course on the role that that shareholder, that owner, is playing within the company operations. The reason that transition period is required, if you think about it, is to manage risk for the buyer post-close. So to the extent that buyer can get comfortable with the risk in operating the business and ensuring that transfer of knowledge and the sustainable of the operation and what made it successful leading up to close, and they can do that whether it's a strategic who might be, again, comfortable with the industry and comfortable with the customers and the suppliers and everything else. It might be because there's a strong second layer of management that started to take a lot of those roles and responsibilities from that owner. So it can depend. In a scenario where, again, a buyer can get comfortable with some of those things, we often see scenarios where there's a very limited kind of formal transition period. There might just be simply a consulting contract where the new acquirer can call that owner and get some guidance on an issue or two that they need post-close. The less comfortable a buyer can get, and this goes to the planning as you move towards a transaction, the less comfortable a buyer gets with that risk profile they're going to require a more formal kind of involvement in the length of time is longer. So you'd might see 1 to 2 years to give that buyer the window to get in, understand the business, get comfortable if they can get that knowledge from the owner and put the right additional management pieces in place. So you certainly see a wide variety because the market's competitive and buyers will get creative for the right deal. But if you're an owner, and you want a quick transition, then really you need to start focusing on building the team around you and making yourself, for a lack of a better word, making yourself as redundant as possible. 

Rachel: Thanks, Ryan, for that. We've got just shy of a minute or so left so I'll put one very quick question to Anita and David Stevens and then I'll wrap up. It is a two part question. We're only going to have time for the second part of the question. Is about the selling of a business and when you do have a sale does that result in the termination of existing employment contracts? So, Anita and David Stevens, if one of you can tackle that in like roughly 30 seconds. That's what you get. 

Anita:    Thanks, Rachel. David, I can handle this one. The short answer is look at the contract. Again, this was one of the due diligence items that we had looked at for employment agreements. Is there a change of control provision that would make the contract cease to be enforceable against the employee? Usually in the context of a share sale, the contract should continue and the employment should not automatically terminate. The thing to keep in mind there is if you do plan on signing on a new agreement, because they employee already was employed, your consideration for entering into that agreement is not fresh employment. So we would only recommend that the buyer includes some kind of signing bonus. It doesn't have to be a large amount. Just to make sure that agreement, there was consideration given for the agreement and it's enforceable. 

Rachel: Thank you so much for that, Anita. We are at time. It is one o'clock so that is where we will wrap today on the Q&A session. As I said before, if we didn't get to your question, sit tight. We have our experts at Gowling and BDO will be in touch to help address any questions that did not get answered. I'd like to take the time to thank each of our expert panelists for taking time out of their busy schedules today, sharing their insights and expertise. Thank you to David Elrick, to David Stevens, to Ryan Farkas and Anita Yuk. I'd like to thank each of you for participating in our webinar today and joining us. We hope that you found it very insightful. We wish you all of the best, keep well and stay safe. Thanks everybody.