Canada’s middle-market merger and acquisition activity is expected to remain strong in 2023, despite a reduced appetite for mega deals and IPOs, according to research from KPMG Corporate Finance.

Canada’s mid-market saw more than 2,600 deals last year, and while each transaction may not be individually financially significant, together, they have a big impact on the national economy. In fact, small and medium-sized businesses employ close to 14 million Canadians and account for 98 percent of employer businesses in Canada, according to 2021 data from Statistics Canada.

Experts believe a growing number of small and medium-sized business owners set to retire in the coming years, coupled with strategic and private equity buyers looking to invest significant capital, will help keep the country’s mid-market active.

If you’re considering buying or selling a company, there are legal and strategic issues to be aware of before you sign any contracts.

What to consider as a prospective buyer

When a potential buyer is in the market to buy a company, there are a number of general considerations that apply to most acquisitions.

From a strategic perspective, it is critical to scrutinize the current and prospective business model of a company you are considering acquiring. Is the company complementary to your current business? Do the pro forma post-acquisition financial statements look sufficiently promising to assume the inherent risks in making an acquisition?

For many buyers, a top priority is the opportunity for cost rationalizations. Are your expectations realistic? What, specifically, are the anticipated financial benefits?  You’ll also want to consider the tax implications of any acquisition.

What are the sources of funds to make this purchase? Will it be via equity, debt or a combination of both? How much leverage can the acquisition support, and are you comfortable carrying it? Do you have financing firmly committed? If so, after a long period of low and relatively stable interest rates, have you modelled the impact of rate changes in a more volatile interest rate environment?

In structuring a purchase transaction, what form of acquisition are you considering? Will it be an asset or share sale? If it’s an asset purchase transaction, then you’ll be acquiring the various assets that together comprise the business. However, you won’t necessarily acquire the contractual rights and obligations that underlay most businesses. 

Conversely, in the case of a share sale, you’ll acquire all the assets of the company together with all of its contractual commitments – both good and bad, i.e. beware of “skeletons in the closet”.

Lastly, have you completed a thorough due diligence investigation of the business, including legal, financial, operational, online and reputational? Have you considered appropriate indemnities, covenants, representations and warranties and potential indemnity protection holdbacks and escrowed funds to protect yourself after the sale? 

If you’re a buyer, you’ll need to justify the purchase and ensure it’s a logical and beneficial acquisition for your portfolio.  

What to consider as a prospective seller

In many ways, selling a business is more straightforward compared to buying, but there are still potential risks of which you’ll want to be aware.

At a basic level, have you considered whether you need to sell at a particular time? Occasionally businesses are sold on a ‘distress sale’ basis, where something has occurred to the business itself, or transpired in the lives of the principals of the company, which makes it difficult to continue in the current manner. In these scenarios, a sale is likely unavoidable.

But if there are no immediate requirements to sell a business, take the time to carefully review other considerations. For example, how robust is the current market environment? Does the current market appear likely to result in you receiving the full price for your business? Alternatively, is the market softening, or perceived to be softening in the near future?

What are the proposed terms of the sale?  Do you require the entire purchase price in cash? What if a potential buyer wants you to “roll” some equity? What if they require vendor take-back financing? It’s important to understand how flexible you are regarding your sale terms and what your appetite is for risk.

You’ll also want to consider your potential exposure after the sale. Does the purchaser require a hold-back, related to indemnity protection, and the escrow of a portion of the purchase price? Escrow periods often run from 12-24 months, as the first 12-24 months following an ownership transition tend to be when issues, which were otherwise obscured during due diligence, may reveal themselves. 

A hold-back involves putting part of the purchase price in escrow for an agreed period after the sale. A purchaser making claims during this period, for a breach of covenants, representations and warranties by a seller, may then have recourse to the escrowed funds. It’s important to consider how much ongoing contingent liability you are prepared to accept post-closing, and for how long after the sale has closed.

Getting the best legal advice for your deal

From a legal perspective, whether you’re a buyer or a seller, you’ll want to choose a lawyer who is competent, can conduct the appropriate legal due diligence, provide appropriate structuring advice and complete the required paperwork to get the deal closed efficiently, expeditiously and in a cost-effective manner.

A lawyer with a seasoned M&A background and, ideally, who has personal experience buying and selling their own company, is an asset as they have first-hand knowledge of the most pressing concerns and various transaction “pain points”.

Getting qualified legal support isn’t just about papering the deal, it’s about choosing a legal partner who can provide guidance and help keep you informed and educated throughout the buying and selling process.

Considering buying or selling a company? If you need help navigating the process, we can help. Caravel has a team of 85 qualified and experienced lawyers, including those who specialize in M&A transactions. Get in touch with our team today to find out more.