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 www.Pinskylaw.ca • View topic - Buying/Selling a Technology Startup

Buying/Selling a Technology Startup

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Buying/Selling a Technology Startup

Postby Pinskylaw.ca » 01 Dec 2015, 14:42

Very few business transactions are as complex and multifaceted as buying or selling of a business. The purchase and sale of a technology business, even a small closely held business, will involve a wide variety of legal and accounting issues, and these are present in all phases of the transaction. A typical entrepreneur generally does not have the expertise to safely make his or her way through these complexities. If he or she waits to consult a lawyer to "fill out the forms" after the basic deal is made, there might be some serious loose ends that could cause the transaction to "unravel". The entrepreneur should retain a lawyer in the early stages of the purchase transaction to identify relevant concerns, explain the effects of various proposals, suggest alternatives and facilitate workable compromises.

After the parties establish the basic terms of the transaction, the lawyer representing a purchaser coordinates preparation of the purchasing documents, analyzes and confirms factual and legal assumptions on which the transaction is based, coordinates actions necessary to effect the transaction and assists in finalizing any post-closing details. There are basically two methods used by a purchaser willing to acquire a business – (1) the purchase of the underlying assets of that business; and (2) the purchase of the shares of the corporation that owns the assets and operates the business. There are a number of factors that will have to be considered in determining whether the purchase will be by way of assets or by way of shares. In most cases the choice as to whether or not the purchase will be by way of assets or shares is a decision that is based on business considerations. The lawyer representing a purchaser may advise the client about the advantages and disadvantages of each method, including the various tax consequences. In fact, tax consequences are extremely important because in many cases the structure of the transaction will be influenced by those considerations.

One of the most useful functions that an acquisition lawyer can perform at the outset of a proposed transaction is to prepare corporate searches as soon as possible. These searches include a search of the corporate records, the traditional security searches (Personal Property Security Act, Bank Act, etc.), obtaining and reviewing list of employees, benefit programs, leases, contracts, intellectual property licences, etc. The existence of charges and encumbrances against the assets of a vendor may be one of the most influential factors in determining whether the sale is of assets or shares. Provisions in contracts granting important contract rights to the enterprise, which make the rights un-assignable, or un-assignable except with consent, or if there are changes of control clauses, may also dictate the way for the enterprise to be transferred. A lawyer should be consulted in each of the following phases:

1. Preliminary planning and evaluation (the assets, the intangibles, evaluating profitability by means other than simply looking at last year's financial statements, etc.);

2. Basic structural considerations (purchase of shares or purchase of assets);

3. A review of tax and accounting considerations;

4. Compliance with securities laws and possible restrictions on the future sale of enterprise interest;

5. Antitrust considerations;

6. Labor law and other personnel considerations (contracts with existing personnel, liability for employment-related claims attributable to the previous owner, and existing employee benefit plans);

7. Bulk transfers, fraudulent transfers and hazardous waste.

The nature of the transaction and the accompanying array of alternative considerations present a client and a lawyer with a myriad of legal issues and a wide variety of other problems that must be taken into account before any crucial decisions are made. It may be necessary to consider any law affecting the conduct of a business, the ability to identify potential problem areas and present practical solutions in a timely manner may be an acquisition lawyer's greatest challenge. Another important element is the ability to identify and clarify situations where disagreement actually involves a failure to distinguish between several separate issues or conversely where an apparent accord conceals disagreement because the parties are operating on two different wavelengths. Moreover, an acquisition lawyer is required to deal with numerous situations that arise as a result of the personalities of the individuals involved in the transaction and the nature of the business to be purchased or sold.
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