Points to Consider When Buying Into an Existing Company

BY VARUN ROBBY SHARMA, ASSOCIATE LAWYER

Lawyers often get inquiries from potential clients related to a proposed arrangement where an individual is offered a chance to tie up with an existing company. Often, the idea involves an exchange of shares for either some consideration and / or services to be provided. This may involve a shareholder agreement to be prepared on the person's behalf. 

If you find yourself in the middle of such a discussion, the questions listed below may guide you to make the right inquiries before confirming or committing to anything - either verbally or in writing. This information should then be taken to a business lawyer to assist you further.

The Business:

You want to gather various details of the business including, but not limited to:  

• How long has it been operation?

• How does it stand financially? Profit / loss in previous year and since existence. 

• How does the company generate business / leads?

• Is everything done locally or does it involve an out of province or international aspect (i.e. parts/ suppliers/ contacts)?

• Does it face or suffers from any liabilities / lawsuit?

• Is it incorporated federally / provincially and where does it operate from?

• Who is involved in the business ? Are there other parties and what are their roles in the business?

• Information re tax status: HST and Income tax. Are they up to date? Anything owing now or in previous years? Ideal to have it in good books of the CRA

• Company financial statements and income tax assessments for the last 3 years may be needed.

Your Role:

 Knowing what the other party's expectations are will provide clarity: 

• What is your role in the company? Is it strictly a sales role?

• Would you be an actual employee or independent contractor?

• Is yours to be a results based role (sales with commission) or will there be some other method of determining performance?

• What happens if you don't achieve certain targets - if imposed on you?

• How involved will you be in the company's day to day operation or from a management standpoint?

• Will you be required to participate in financing the business? To provide guarantees on loans etc.?

The Future: 

It will be important to figure out, as much as possible, where the company / business is heading: 

• What is the vision for the company?

• Where does the owner see it in: 1 year; 5 years?

• Are there any changes the owner can foresee if this arrangement is successful / unsuccessful?

Shares:

You may want an idea of what, if any, exchange is to take place: 

• What would be the potential percentage of the shares issued to you?

• What, if anything is the issuance of shares contingent on?

• Is there any expectation of capital upfront?

• Any special rights / privileges attached to the shares that the owner wants?

Additional: 

Any additional information will be of help: 

• Does the company use an existing accountant / lawyer - eventually we will require that information. 

• Do you retain the contacts that you may introduce to the company? 

Please note that the informatioin in this article is for general guidance only and does not constitute legal advice. We urge you to consult with a business lawyer before entering into a transaction or agreement. 

At Wise Law Office. our business lawyers assist our clients with corporations and preparation of Shareholder Agreements.  Visit our website for more information on our services for businesses.

 - Varun Robby Sharma, Associate Lawyer