The life cycle of a deal

Part 1: types of acquisitions and first steps

Corporate Update


Although the ‎life cycle of a deal varies depending on the type of the transaction and the industry of the ‎target ‎business, many life cycle stages are similar.‎ Part 1 of the Life Cycle of a Deal series sets out the ‎types of acquisitions and the first five stages of a‎ deal's life cycle.‎

Types of acquisitions

Generally, there are two types of acquisitions:‎

  • an asset acquisition; and ‎
  • a share acquisition. ‎

In an asset acquisition, the purchaser acquires a specific set of assets and liabilities of the target. In a ‎share acquisition, the purchaser acquires a controlling interest or all of the issued and outstanding shares ‎of the ‎target.‎

A transaction may also be an amalgamation, whereby the amalgamated corporation assumes all assets, ‎rights, and liabilities of each amalgamating ‎corporation. An amalgamation is rarely used as a standalone ‎acquisition structure. It is most ‎commonly used in the context of a share acquisition when the purchaser ‎is amalgamating with the ‎target post-closing.‎

There is greater flexibility in an asset acquisition as the buyer has control over which ‎assets/liabilities are ‎being acquired. In line with this, there is reduced risk. In a share acquisition, ‎the buyer acquires the whole ‎business. For various reasons, a vendor prefers a share acquisition, while a ‎purchaser prefers an asset ‎acquisition. ‎ ‎

Stage 1: A vendor should examine their goals and their business

Selling a business is like selling a house: it ‎should have a "curb appeal". To attain that “curb appeal", the ‎vendor must first examine its ‎business and the specific goals it is trying to achieve with the transaction.‎ ‎Following are some of the questions a vendor should ask when examining their goals.‎

What do you want to do and when?‎

Objectives usually include a combination of business, ‎personal and tax considerations. ‎‎Preparing for and executing a sale may take up to 12 months. The actual sale process, ‎including negotiating with the preferred ‎buyer and closing the deal, often takes up to half ‎of that time.‎

What is your business worth?‎

Typically, different industries have different valuation multiples or ‎conventions. The ‎management team and other key employees, intellectual property, goodwill, customer ‎lists, ‎and earning capacity are likely considered the most valuable assets of the target. ‎However, buyers may value ‎these core assets differently: a financial buyer may value the ‎current management team more than an industry ‎buyer with its own management team in ‎play already. ‎

Whose help do I need?‎

The vendor will need to ‎engage lawyers and accountants with transaction experience. ‎M&A advisors can help identify ‎prospective buyers and market the vendor’s business to ‎them.‎

For more information, please see: Getting your business ready to sell. ‎

Stage 2: A vendor must prepare their business for sale

When a buyer is preparing to purchase a business, they perform ‎a version of a home inspection. To ‎prepare for this “home inspection”, the vendor must conduct vendor-side ‎due diligence.‎‎

  • General corporate documents: The vendor should have their lawyer review the minute books and ‎all extra-provincial registrations. ‎
  • Accounting records, taxes and financial statements: The accountant should confirm that all financial and accounting records ‎are ‎complete, ‎accurate and up to date. ‎
  • Material agreements: Buyers will want to see copies of all of the material agreements into which the company ‎has ‎entered. Material agreements should also be reviewed for any ‎change of control ‎provisions (if you intend to sell the shares in your company) or assignment ‎provisions (if ‎you plan to sell just the assets).‎ ‎
  • Intellectual property: The vendor should confirm that all trademarks, patents, ‎copyrights and business names ‎are duly registered and protected. If ‎the vendor has any IP developed by contractors or ‎if the business uses any improperly obtained ‎software, they must confirm that they have ‎the proper assignments from their contractors ‎and obtain legitimate software copies.‎
  • Labor and employment/human resources: A critical question is whether the existing employees will be retained. If employees are ‎not being retained, it must be determined who ‎will be responsible for notice and ‎severance.‎
  • Real property: If the vendor own real property, the vendor must deliver a clean ‎title to the real property ‎they are selling. ‎ ‎
  • Licences and permits: Depending on the business, a vendor must review what licenses and permits are needed ‎to ‎operate their business and whether they are in good standing. ‎‎
  • Disputes and litigation: If the business is involved in litigation, a potential buyer will want to know the amount of ‎the ‎claim(s) and the likely outcome of the lawsuit(s).‎
  • Other: The vendor should remove all stale liens and update/populate the data room with all ‎‎relevant documents for the buyer to review.‎

For more information, please see: Seller due diligence: Are you ready for buyer’ questions?

Stage 3: Drafting a non-disclosure agreement

Once a vendor has found a potential buyer, it will need to share valuable secrets with the ‎buyer or ‎investors. In light of this, all parties should sign an effective non-disclosure agreement ‎‎("NDA").‎

Ensure key confidential information is covered

The first step is ‎determining what information is confidential and the degree to which a party should ‎attempt to protect it ‎under an NDA.‎

Specify proper use

An NDA has two significant features: (1) a specific description of the purposes ‎for which ‎confidential ‎information may be used, and (2) a blanket prohibition on ‎using it for anything other ‎than the prescribed ‎purpose. ‎

Stipulate protective measures

Parties should consider the level of care taken to avoid disclosing ‎confidential information. ‎

Don't treat all information as confidential

The parties will need to carve out or exempt certain ‎categories of possible confidential information.

Don't ignore third parties

Often, there is a ‎reasonable need to disclose information to employees or professional ‎advisors, but this ‎should be ‎‎considered on a case-by-case basis. ‎

NDA’s don't last forever

‎Typically, ‎confidentiality provisions in commercial transactions survive for approximately two ‎years. ‎

For more information, please see: Confidentiality and non-disclosure agreements.‎

Stage 4: Drafting a letter of intent

Letters of intent ("LOIs") ‎outline the key parameters of a transaction so the parties can be ‎on the ‎same ‎page before spending the ‎time and money to negotiate final legal ‎agreements. LOIs are typically non-‎binding other than a few binding provisions. ‎

  • Focus on valuation and payment: The most important aspects of any business transaction are ‎what is being transacted, ‎how much it ‎is ‎worth, and how it is being paid and whether ‎there are any adjustments.‎
  • Clearly state the key conditions to closing: LOIs should set ‎out any conditions ‎required to be ‎met before the execution of final agreements.‎
  • Keep things confidential: The LOI should include a binding ‎confidentiality provision to ‎ensure ‎sensitive ‎business information is not made public. ‎ ‎
  • Set a timetable: Using an LOI to set out the proposed timetable will help keep the ‎due ‎diligence ‎and legal negotiations moving ‎swiftly. ‎
  • Consider the length of the exclusivity provision: Purchasers will often seek the assurances of exclusivity ‎when negotiating with a ‎vendor. ‎‎ ‎

For more information, please see: Letters of Intent for buying/selling a business.

Stage 5: Conducting due diligence from a buyer's perspective

It is equally essential for a buyer to conduct a due diligence review of ‎the target business (typically after ‎an LOI is signed). In an extreme case, diligence findings may cause the ‎purchaser to abandon the ‎‎transaction. However, more typically, ‎diligence findings will help guide the ‎negotiation of contractual ‎provisions ‎‎(such as representations and warranties, ‎indemnity provisions, conditions to ‎closing, etc.) in ‎the underlying ‎definitive agreement.‎

The key objectives of due diligence in private M&A transactions include:‎

  • Confirming that the vendor has good title to the business (i.e., shares) or assets being acquired;‎
  • Locating potential liabilities or risks associated with the business or assets being acquired; ‎
  • Locating any impediments to the transaction, such as third-party consents, problematic ‎provisions in material contracts, a required shareholder class vote, or prohibitions on transfer; ‎and ‎
  • Confirming the transaction structure and determining what legal documents are required to ‎complete the deal properly.‎

The following is a non-exhaustive list of information the buyer should examine during their due diligence ‎review:‎

Minute books‎

The buyer's legal team should review the minute books of the target, ensuring that they:‎

  • are organized and complete;‎
  • properly reflect the capitalization and share ownership of the target; and
  • include extra-provincial registrations in each jurisdiction in which the target operates.‎

The minute books should ensure that all material agreements and actions taken by the target were duly ‎authorized and approved by directors' or shareholders' resolutions, as applicable.‎

Public record and registry searches

The buyer should conduct public records and registry searches. Specifically, the buyer should conduct ‎searches regarding: status and standing, ‎business names, bankruptcy, section 427 of the Bank Act, real ‎estate, personal property securities, taxes, ‎IP, and litigation. These searches will assist in confirming ‎whether the vendor has the ‎capacity to sell the target business or assets and ensure no encumbrances ‎are on title. Most of ‎these searches should be completed in the province or municipality where the target ‎business or ‎shares are located. However, if the assets are located in more than one province or territory, ‎such ‎public searches should be conducted in each additional jurisdiction.‎

Contracts and regulatory approvals ‎

Several contractual provisions can significantly impact a transaction. This includes any change of ‎‎control, assignment provisions and termination provisions. Many leases and ‎other contracts contain a ‎change of control clause, which requires a third-party's approval to lease ‎or assign the contract if there is ‎a change in the target corporation's control. If the corporation ‎wants to continue to retain the benefit of ‎the lease or contract, they will often require the ‎landlord's or other third-party’s written consent. Moreover, ‎the buyer should be aware of any restrictive covenants, most favoured ‎nation provisions and lingering ‎security interests.‎ Finally, the purchaser should make a note of any expired contracts and whether they ‎can be renewed.‎

If the business is regulated, the purchaser should confirm that the target business is in compliance with ‎all of its regulatory approvals. Moreover, the purchaser should note if the regulators must approve the ‎transaction.‎

Depending on the nature of the transaction, some of the due diligence should be conducted by ‎legal ‎specialists. This includes real estate, IP, and environmental matter. Legal counsel should be ‎retained to ‎examine specific tax and regulatory matters and consequences. Outside consultants, ‎such as ‎accountants and insurance specialists are sometimes retained as well.‎

Look for the next installment of our Life Cycle of a Deal series discussing the key terms in a purchase agreement in the upcoming ninth edition of Growing your Canadian Business.


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