By: Jayson Schwarz and Konstantine Chatzidimos
Everyone thinks that all you need to do is have money for a retainer and you can hire the lawyer you want . . . Not true!!!! There are many times when clients neglect their own affairs and leave things to the last minute. Sometimes as a lawyer we cannot take a file because we cannot finish things up properly and to take on the matter could expose the lawyer to big potential liabilities. This happens more often in real estate situations but it can also occur in the context of buying a business. Buying a business has many complexities that need to be explored in order to guarantee that the purchaser is getting what they bargained for.
I was recently approached by a potential client wishing to buy the assets of a restaurant whose owner was in a hurry to sell as she was leaving the country. The purchase price was attractive and the buyer expressed the need to act quickly for fear that the opportunity would evaporate. This was Tuesday morning and the client “needed” to close the deal by Friday afternoon. We did not take the file.
The first reason arises by virtue of a statute called the Bulk Sales Act (the “Act”). Although the purchaser may have felt that there was a great opportunity on the Friday, he could very likely have been liable to pay more than the cost of the business after closing to the seller’s creditors, including the Government. Bulk sales legislation is meant to prevent slippery business owners from selling off their assets, failing to pay their creditors and then disappearing with the cash. The Act puts the onus on buyers to prove that the seller has complied with the legislation. If a buyer completes a transaction and there is no bulk sales compliance, the buyer may be liable to the seller’s creditors as the slippery vendor will have disappeared. If the Buyer had ensured the Seller complied with the Act he would have been protected.
Having to pay business creditors is just one risk associated with a “quickie closing”; another big risk relates to provincial sales tax. Persons who sell their businesses or business assets through a sale in bulk are required to obtain a Clearance Certificate from the Ministry of Finance. A Clearance Certificate confirms that all retail sales taxes collectible or payable by the seller has been paid. Failure to obtain such a certificate from the seller may result in the buyer being held liable for any retail sales taxes owed by the seller at the time of sale. Obtaining a Clearance Certificate can take up to three (3) weeks and the request for a Clearance Certificate could trigger an audit which will further delay everything. It is paramount that this due diligence is not ignored in the interests of a fast closing.
Another reason we could not act on the restaurant deal had to do with the fact that searches of Building, Fire and Health Departments could not be conducted in time. We had to check for any violations or work orders against the business. For example, if the seller of the restaurant had been advised by the Fire Department to install a new sprinkler system and had not done so by closing, it the buyer would incur this expense once he became owner of the business.
On another note one of the things we are concerned about is the possibility of fraud and money laundering and sometimes people try to get away with this by creating a fast closing with large fees. Most lawyers are aware enough to prevent this.
The moral of the story is quite simple. Make sure there is enough time and get the job done right!!!!! Although it may seem simple on its face, the purchase of any business is complicated if you want to be protected from potential liabilities. A lawyer has both a legal and moral obligation to protect you from the many traps, pitfalls and dangers inherent in purchasing a business, but every lawyer needs the time to do it right and the good lawyers will turn you away if there is not enough time.
