Private Company M&A Deals: FAQ


Getting Started

What is the best structure for a purchase and sale transaction from a tax perspective?

While this is a question we are frequently asked, it is not one that is easily answered in this type of FAQ. The circumstances of the parties, the nature of the business and other factors will affect the tax structuring and planning. There is no one size fits all approach to tax planning for purchase and sale transactions. The parties and their tax advisors will have to consider such matters as residency, capital gains treatment and exemptions, purchase price allocation and the ability to retain any unutilized tax losses.

Is it better to enter into a letter of intent or move directly to negotiating a definitive purchase and sale agreement?

Before the parties to a proposed transaction start negotiating terms or disclosing information, it is critical, particularly for the vendor, that the parties negotiate an appropriate non-disclosure agreement (NDA). Vendors want to ensure that the NDA adequately protects their confidential information, employees and customers while purchasers want to make sure the NDA is not overly restrictive with the potential of hampering future competitive activities. Sometimes the NDA will include an exclusivity clause, often referred to as a “no shop”, preventing the vendor from further marketing the target for a period of time while the purchaser conducts due diligence and the parties negotiate a purchase agreement. The no shop may also be included in a separate agreement or a letter of intent (LOI) if the deal proceeds by way of a LOI.

Once the NDA is in place, the question becomes whether the parties should enter into a letter of intent setting out economic and other key terms or move directly to negotiating a binding purchase agreement.

In our experience, private company purchase and sale transactions typically begin with an NDA followed by a LOI, which includes a binding no shop clause. The LOI usually provides that the completion of the proposed transaction is subject to the purchaser completing due diligence and the parties entering into a mutually acceptable purchase and sale agreement by a certain date. This process gives the purchaser a specified period of time to conduct due diligence and negotiate a definitive purchase agreement without the threat of the vendor shopping the target to another prospective purchaser. As long as the LOI includes economic and other key deal terms, it also provides both parties with some comfort that they will reach agreement on the terms of the definitive agreement, justifying the target being taken off the market, and the parties incurring the expense of moving forward with the transaction.

The following are common LOI clauses:

  • Type of transaction – assets or shares
  • Purchase price and adjustment terms
  • Earn-outs
  • Vendor take-back financing
  • Proposed timeline
  • Indemnity provisions
  • Holdback and escrow to secure claims
  • Exclusivity/no shop
  • Customary representations and warranties from vendors/target
  • Survival period of representations and warranties
  • Closing conditions
  • Non-competes from vendors
  • A provision setting out which clauses are binding
  • Employment agreement from key employees

In some smaller deals, the cost of negotiating an LOI may outweigh the benefits. In those situations it is often more economical to move directly to a definitive purchase agreement.

We find that clients will often contact us after an LOI has been signed and the parties are ready to proceed with due diligence and a definitive agreement. While that arrangement usually works well when experienced in-house counsel is involved, we do not recommend that approach for clients who do not have access to internal counsel. A poorly drafted LOI can lead to significant problems and additional legal expense. The LOI might place the client in a weak bargaining position when negotiating the definitive agreement because of the terms included in the LOI. This is true whether or not the LOI is binding because the LOI creates a sense of moral obligation on the parties to abide by the terms of the LOI. If it is not clear whether the LOI is binding or non-binding, it can lead to expensive litigation and unintended results. In most cases, we recommend that counsel review the LOI before it is signed.

Documenting the Transaction

Which representations and warranties are most important?

Canadian purchase and sale agreements tend to track the following format:

  • Definitions and interpretation
  • Subject matter, purchase price and adjustments
  • Representations and warranties
  • Pre-closing covenants
  • Conditions to closing
  • Closing deliveries
  • Post-closing covenants
  • Indemnities
  • Miscellaneous boiler plate
  • Signatures
  • Schedules and disclosure schedules

In most transactions the representations and warranties of the vendor are extensive and comprise a substantial portion of the purchase agreement.

From the purchaser’s perspective, the most important representations and warranties are those that:

  1. relate to the key assets and value elements of the target; and
  2. bear on potential financial exposures and other material liabilities of the target.

As each transaction and target is different, it is critical that purchasers and their counsel identify these matters and customize the representations and warranties to adequately address them. For example, for an industrial business environmental risks will likely be of particular concern whereas for a technology company intellectual property representations will be critical. Financial statements and tax representations are always of the utmost importance as are representations relating to title and ownership.

From a vendor’s perspective, all of the representations and warranties are important as any inaccuracy will likely expose the vendor to a purchase price reduction or other post-closing liability. Accordingly, it is critical that vendors carefully review each and every representation and warranty for accuracy. Any exceptions or qualifications must be clearly set out in the disclosure schedules.

What are disclosure schedules?

The vendor’s representations and warranties in the purchase agreement will often be qualified by referring to attached disclosure schedules which set out qualifications or exceptions to the representations and warranties. Vendors will want to ensure they fully and accurately disclose all material risks in the disclosure schedules to minimize the possibility of indemnity claims being made by the purchaser.

Purchasers will want to ensure that the disclosure schedules do not contain broad or ambiguous disclosures that essentially negate or modify the representation. Purchasers should also ensure that the risk of breach is not shifted from the vendor to the purchaser.

What are customary closing conditions for private business purchase and sale transactions?

The following are customary closing conditions:

  • Representations and warranties being true in all material respects
  • Performance of all pre-closing covenants in all material respects
  • Obtaining all required contractual and regulatory consents
  • Completion of due diligence
  • Absence of litigation
  • Delivery of all closing documents and payments

Some examples of non-customary closing conditions include:

  • Purchaser obtaining financing
  • Approval of the purchaser’s board of directors
  • Retention of key employees
  • Retention of key customers

How long do representations and warranties typically survive?

In British Columbia, one, two and three year survival periods are typical, but purchasers often require longer survival periods for representations and warranties relating to tax, title, the environment and certain other matters with longer term risk profiles.

Is it customary for vendors to enter into non-compete agreements on closing?


What is the typical time period and geographic scope of non-compete agreements?

There is no typical time period or geographic area when it comes to negotiating an enforceable non-compete covenant, the key being enforceability. British Columbia courts will enforce a non-compete covenant, provided it is reasonable between the parties and with regard to the public interest. The courts have to balance the competing issues of freedom of contract, the public interest of competition, and allowing people to earn a living. What is considered a reasonable time period and geographic area will depend on the business being sold and what is necessary to protect the purchaser’s interest in the newly acquired business. In the context of the sale of a business (as opposed to the employment context), British Columbia courts are more likely to uphold a broader covenant. That said, legitimate business objectives, proprietary interests, and business realities must be taken into consideration when determining the scope of the non-compete.

We advise purchasers to be conservative and seek only what is necessary to protect the newly acquired business. If the vendor of the business is being retained as an employee, it is not uncommon to have two non-compete covenants: the first running from the closing date of the transaction and the second running from the end of the vendor’s employment with the target business.

We Can Help

Our Private Company Transaction Group has extensive experience advising purchasers and vendors of privately owned businesses. Whether large or small, purchase and sale transactions involve complex legal issues requiring experienced and capable counsel. Our skilled team is complemented by experienced lawyers in our tax, employment, intellectual property, and other specialized groups that are critical to completing a successful transaction. As a client focused law firm, we are committed to providing you with exceptional service and effective and efficient representation. We offer a project management approach to transaction files providing clients with predictability, efficiency and cost control. Please contact us to discuss your legal needs.