Legal Aspects of Business Succession Planning

At long last, I’m celebrating the new year by finishing off this series of succession planning articles. I’ve already talked about the big picture, and how to make sure your business can continue to run if something happens to you. Now it’s time to talk about how you can retire. This isn’t something that should be done in a hurry – it’s wise to give yourself a few months to make the plan and expect it to take years to live out the plan.

There are four main ways that business owners hand over control and operation of small businesses to a successor:

  • Passing the business to a family member,
  • Selling the business to management or employees over time,
  • Selling the business in one fell swoop, or
  • Passing the business in your will (if you want to stick it out ‘til the bitter end…)

Despite the different terms I’m using, all of above except the last are selling the business as far as the tax man sees it. Each of these routes allows you to cash out – or extract the value you’ve built up in the business. Even though the end result of each is similar, the legal path you’ll need to walk to get there is different in each case, with some common elements between them. I’ll talk about each option below. What will work for you depends on what you want, the tax costs, and what is realistic for your business, successor, family, and employees.

Before I dig into the guts of succession, I’ll touch on a few issues that will pop up no matter which way you opt to go – both of them have to do with the almighty dollar.

Valuation

No matter what route you choose, valuing the business will be a pain in the behind. Valuing a business for sale, transfer, or estate purposes can be tricky. As you likely know already, “tricky” is usually lawyer-speak for “expensive,” so brace yourself.

There’s no single formula to value a business. The bigger and more diverse the company, the trickier it is to value. “Tangible assets” – like machinery, inventory, and accounts receivable – are pretty easy to put a price on, while “Intangible assets,” – like client lists, intellectual property, social media influence, or a recognized brand – are more difficult. Equally tough is when you, the owner, are a big part of the business’ worth.

Businesses can be valued by a number of different ways, but the two most common are:

  • Agreement between the buyer and seller
  • Valuation by an accountant, auditor, or certified business valuator

Agreement on price is the cheapest, but the price that you agree to with the buyer might not be the amount that tax is assessed on. You report the sale price, but the CRA will deem the sale to have been made at fair market value. Funnily enough, the CRA rarely finds that the sale happened at a lower value than what was reported. You may end up on the hook for more taxes than you calculated, which cuts into your retirement nest egg.

The CRA and tax courts tend to stick to valuations made by certified business valuators (very expensive), and sometimes accountants (moderately expensive) for tax purposes. Hiring one of those dudes to value your business could cost more than you’re willing to spend… but sometimes the up-front cost of paying a valuator is lower than the potential long-term cost of an extra tax bill. It’s worthwhile to at least have the conversation with your accountant.

Tax Efficiency

Speaking of the CRA, most transfers or sales of businesses can be made cheaper by getting sound accounting advice on how to minimize the tax on the transfer. The more the business is worth, the more likely it is that the transfer will be tax-driven. “Tax-driven” means that your accountant is telling your lawyer how to arrange the purchase and sale so that you (and possibly the buyer) pay the minimum tax possible.

A note of caution on accountants – not all of them know tax. Many small business accountants are good at preparing annual income tax returns, and helping to manage cash flow, but aren’t experts on the tax implications of selling a business. Even if you’ve been with your accountant for years, don’t be afraid to shop around. Moral of the story? Get accounting advice early in the succession planning process.

With that out of the way, here’s the rub:

Four Ways to Transfer Your Business to a Successor

Passing to Family

Selling or passing all or part of the business on to a family member can be a sale, gift, or some combination of the two. There are a number of ways to work this, but what’s best for most small businesses is a gradual transfer of operational control and profit share.

On the operations side, a gradual transfer of responsibility gives your successor a chance to get up to speed on how the business works, build relationships with key customers, advisors, and suppliers, and allows you to pass on the lessons and values you’ve picked up along the way.

As far as profit sharing, if the business’ cash flow can stand it, you may want to continue to draw some sort of income from the company. If not, an incremental buy-out by the next generation or the business itself – usually 5-10% of the value of the business per year – might give you 10-20 years of “income” out of the value you built in the business. That incremental buy-out is usually good for the successor as well, as they don’t have to come up with all the money to buy the company right away. It could also be done as an incremental buy-in, where some of the successor’s pay is in shares, which dilutes your ownership of the company over time.

So long as you own shares in the company, you should consider life insurance. The more your stake is worth, the more this makes sense. Insurance policies pay out directly to the beneficiary – your successor or the company itself – to buy back the shares, and keep those shares out of your estate.

The typical legal documents involved in a family succession include:

  • Unanimous Shareholders’ Agreement – which can set out the terms of any buy-out or buy-in, valuation, insurance, and your continued role in the company, if any. Each shareholder signing it should have independent legal advice.
  • Share Freeze – is a fairly complex transaction where the value of the company “freezes” at a certain date, and you’re issued shares that reflect that frozen value. The successor gets new shares which will capture any further growth in value. The company then buys back the freeze shares over time and cancels them. Your freeze shares could have dividend and voting rights that allow you to continue to share in the profits and management of the company.
  • Trusts – where your shares are managed by someone else on behalf of your successor. These are useful when one or more of your successors doesn’t yet have the age or experience to run the company completely. Trusts are also useful if you’re separating ownership and operations of the business between two or more people.
  • Will – if you pass away before the transfer is complete, you can set out how your shares are to be dealt with. Ensure that the terms of your will match with the terms of any shareholders’ agreement, trust documents, and so forth.
  • Powers of Attorney – if you’re incapacitated before the transfer is complete, who will oversee the management of the company, and manage your shares? Any requirements or restrictions on how the attorney is to act should be set out. This must jive with all the other documents.

On the tax side of things, transfers of property to family members are not at “arm’s length”, and are taxed differently than sales to non-family members.

Selling to Management or Employees

Long-term managers and employees can often feel like family, and a transfer to them can be done much in the same way as to a family member. It can also be done in concert with transfer to a family member – perhaps 51% control of the business will stay in the family, while 49% will go to the employees who will continue to run it. If the employees or managers have the funds available to buy right away, it can be a one-and-done sale, or a phased buy-out or buy-in. These transfers are typically done over 3-5 years, and are “arms-length”, meaning that different tax rules apply than to transfers to family.

Assuming that you’re being bought out, rather than simply giving the shares to the employees, this process will be more formal and legalistic. You should insist that the buyer get independent legal and tax advice so they can’t come back later and say that they didn’t get what they bargained for.

Before writing anything up, you should hash out with the buyer the broad strokes of how the transfer will be structured, and how the buyer will finance the purchase. It can be any combination of:

  • Employee stock option plans – where employees are paid shares as part of their pay, and your ownership and control of the company is diluted over time.
  • Purchase and sale agreement – a contract between the buyer and the seller that sets out all of the key terms of sale. It can include employee stock options, or it can be a straight up purchase of the assets or shares of the company.
  • Shareholders’ agreement – as above.
  • Service agreement – especially if it’s a one-and-done purchase, the buyer may want your services and advice as an employee or independent contractor. They may want you to continue to sit on the board, or to serve as an officer of the company.
  • Indemnity and releases – where the company agrees to protect you for the consequences of legitimate actions you took while a shareholder, officer, or director of the company, and release you from any liability for actions taken after you transferred ownership or control. These are often included in the purchase and sale agreement.

The buyer should conduct due diligence before buying, particularly if you’ve been the one to handle the back-end workings of the business such as dealing with lawyers and accountants. It’s important that the buyer knows what they’re buying, the financial history and projections of the company, and that the books and records are in good order.

Lastly, you’ll want to make sure that your will, trust documents, powers of attorney, and domestic contracts jive with the deal you’ve made.

Selling to Third Parties

If you can’t find anyone in your family or business who’s willing or able to take over from you, it may be time to prepare your business for sale. I won’t go in to too much detail, as I’ll cover sale of business in a separate article, but it will require some legal work to prepare for due diligence.

Due diligence is when the buyer digs through the corporate records to make sure that they know what they’re buying. You should be proactive to make sure that the minute book, employee agreements, accounting records, lists of assets and liabilities, leases, real estate ownership and mortgages, intellectual property, debts, shareholder relations, taxes, and licenses are in good order.

Passing the Business in your Will

Many business owners approach is “I’ll just pass everything in my will.” This is a mixed-bag approach that chooses to duck the costs of preparing and implementing a succession plan, while sacrificing certainty and control.

The upside to this approach is that there’s minimal headache and expense for you in the here and now. It can work very well when your successor is clear – perhaps an only child who’s been working in the company for years, and knows what you know.

The downside is that you may handicap the next generation’s ability to run the company. If the business is asset-rich, but cash-poor, the tax bill on the estate might cripple the company. You will have no control over what happens after you’re gone. Your beneficiary will be stuck with making the tough decisions you’ve abdicated from. It also risks infighting between beneficiaries, or with the company controlled by people who don’t know or care about the business.

I’m not saying leaving the company in your will is a bad decision – just know what risks and benefits you’ll be passing on to your successor before you make the choice.

Phew, that was a long one… I promise I’ll write something more entertaining soon…

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

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Contingency Planning for Small Business

Owning your own business is kind of like giving birth to a needy child. It will fill your days with all manner of excitement, some good, some bad. There also comes a time when you need to start considering what happens to the child if and when you’re not around to take care of it anymore. What happens if you get sick? What if you kick the bucket? What if personal or family problems prevent you from running the business day to day? How the hell are you ever going to retire? None of those things, save perhaps retirement, are pleasant brunch conversation, but they must be had. They’re the first step in making contingency plans. Without such plans, the well-being of your family, employees, and company may be left in limbo – legally, financially, and business-wise. Contingency plans are certainly not decisions that should be made hastily, nor should they be made alone.

This is the first in a series of three articles I’ll be writing on the topic of contingency planning for your small business. This first one will be a general overview of who and what steps are involved in the process. The next two will touch on:

  1. Business continuation planning – if you become sick or incapacitated unexpectedly, and
  2. Business succession planning – how to retire and get the value you grew in the business out of the business.

Goals

Each business owner will have a different view of what they want out of “retired” life, but there are a few overarching goals that should be built into any succession plan:

  1. to make a smooth transition to a successor;
  2. to see the business in good hands going forward; and
  3. to have financial security in retirement or during illness or incapacity.

Timeline

When I say not to make the decision hastily, I mean it. There are a bunch of hard decisions that you’ll need to make. Your decisions will affect the people you care about the most – friends, family, employees, collaborators, customers/clients, suppliers, and so on.

For business continuation planning, give yourself a couple of months to put the plan together. This will give you time to have those tough discussions, get meaningful feedback and advice, gather the appropriate information, and get all the paperwork done. You want to ensure that the plan you’ve made is feasible, and will work even if the worst case scenario happens. You may also have to start training your staff to do what you do, which can take considerable time as well.

For business succession, allow several months to make the plan, and at least 3-5 years to ease the plan into effect. All of the same steps for business continuation planning apply here, but with a different end-game. So, if you’re a baby boomer who’s looking to make a slow, graceful exit from the business, the time to start planning is now…

Who’s involved?

It’s one thing to decide who you want to carry the flag for you, and another thing altogether for them to want to pick it up and run with it. There are two rounds of consultation to do – one with those affected by the plan, the other with the advisers that will help you piece it together.

In the first round of talks, you’re trying to figure out who’s willing and able to take over the business. At the end of the day, it’s up to you and your co-owners to choose, but I pity the fool who tries to pass their affairs on to someone who doesn’t care to take over, or doesn’t have the ability to run the business effectively. The folks you should talk to include:

  • Family members – particularly your spouse, children, and others who could be beneficiaries in your will
  • Business partners/co-owners/other shareholders
  • Friends with an interest in the business
  • Managers and senior employees
  • Major creditors

After those talks, you should have a pretty good idea of who’s willing to take over, what knowledge gaps need to be filled to get them ready to do your job should you not be able to. Then it’s up to you and your co-owners to choose who will take over, and when.

Once you’ve got a plan, it’s time to figure out how to put it into action. This is where your advisers earn their keep. You should talk to your:

  • Tax planning accountant**
  • Lawyer
  • Insurance agent
  • Banker, and
  • Major creditors

I put two of these bad boys – ** – next to the tax planning accountant for a reason. Many small businesses have an accountant who does their books and prepares tax returns each year. This accountant may be great, but they’re not necessarily a tax planning expert. A CA who focuses on tax planning can help you to get your money out of the business with minimal taxes. Your accountant will take the lead in planning how it’s to be done, your lawyer will do the grunt work to set up all of the structures, and your insurance agent will help you figure out how it’ll all get paid for.

The People Factor

As you well know by now, a successful business is only as good as the people who run it. If your business is doing well enough to prompt you to make contingency plans, then it’s also doing well enough for you to start grooming your employees to take more responsibility in it. When the employees are running a bigger piece of the company, you’re able to phase out gradually. This means training them to do what you do, allowing them to make mistakes and correct them, and developing their leadership skills. This learning curve may take years, so start doing it right away.

There’s a saying in the army that “no plan survives first contact with the enemy”, meaning that every plan looks great on paper, but things rarely ever go according to plan. It’s wise to build contingencies into your contingencies. Pick more than one worthy successor, or have more than one option. That way if your #1 choice jumps at a different opportunity, falls ill, or turns out not to have the leadership skills needed to take the business forward, you’re not up a fecal watercourse with no means of mechanical locomotion.

Conclusion

This was a very brief overview of the contingency planning process. In the next article, which you can find here, I’ll dive a little deeper into business continuation planning, and some of the legal stuff that’s involved in it.

If you’re looking for a more in-depth discussion of contingency planning, the Canadian Federation of Independent Business has an excellent guide up for free. The Government of Canada has published a quick online guide, and most banks and insurance companies have similar publications.

See you again soon!

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

Incorporating an Existing Business

I’ve talked about the pros and cons of different business structures in an earlier article, but what happens when you start out as a sole proprietor or in a partnership, and later want to incorporate? The transition needs to be seamless, so that the corporation can step right in to your shoes and carry on business.

This is something I deal with regularly, and unfortunately it’s not a simple process. It’s difficult for a layman to do without some professional advice from your lawyer, and accountant or tax nerd. The details count here – to the point that writing this blog post took about 8 hours of work. Doing it the wrong way could lead to paying unexpected taxes, interest and penalties, muddy the water about who owns business assets, and stick you with personal liability for things that you thought were pushed over to the corporation. Fear not, intrepid entrepreneur – there’s a way through the maze

OK, what’s so friggin’ complicated?

There are three steps to incorporating an existing business:

  1. Incorporation and organization of a new company;
  2. Sale of the business or partnership to the corporation; and
  3. Joint election to defer the paying of capital gains tax.

Each step has its quirks, which I’ll explain below. There are a bunch of other business steps that you should take to make the transition seamless – this handy dandy checklist should help. Every case will be different – but at least you can get an idea of the key tasks. The rest of the article deals with the process on the legal side. Let’s git ‘r done:

1. Incorporation

Take the usual steps to incorporate your company –name search, and filing of the articles of incorporation with the fee payable to the Ministry. If you’ve registered your existing business’ name, and want to use a similar name for the new corporation, you’ll have to file a signed letter, or completed consent form with the articles of incorporation. You may want to include a share price adjustment clause in the articles of incorporation, in case the Canada Revenue Agency (CRA) puts a different value on the sale than you did.

The value of the shares that you’ll own will depend on the sale price. It’s important that the numbers add up, and are consistent between the sale agreement, the documents in the corporation’s minute book, and the election to defer the capital gains tax that you file.

2. Selling the Business:  Tax Rollover

Once your corporation is all set up, it is a “person” (and a taxpayer) in the eyes of the law. It can own property, enter into contracts, and do all that other fun stuff that you do for work. The problem is that the corporation doesn’t actually own anything yet, or have a right to take over your business. You own the corporation, and you also own the assets of the existing business, but they’re different people entirely. In order to merge the two, you’ve got to sell your sole proprietorship to your corporation.

The CRA will want you to pay capital gains tax on the sale. When you started your business, it was worthless. Through your hard work, it has grown in value – accumulating cash, equipment, inventory, contracts, real estate, etc. – which is a capital gain. When you sell the business, the capital gain is realized, and 50% of that amount will be added to your personal income as capital gains tax.

As pleasant as that sounds, you’re allowed to put off payment of the capital gains tax. Since you’re actually only selling the business back to yourself – you’re still are the beneficial owner of the business through your shares of the corporation – you’re not actually realizing the capital gain. You still have to pay it when you actually sell the business to someone else – but you can avoid it for now. This is known as a “tax rollover”. Lawyers, accountants, and various other nerds call this “deferring the realization of a capital gain”. Bottom line is you’ll have more money left to keep your business afloat.

To defer the capital gain, you must sell the business to the corporation at fair market value, in exchange for shares of the corporation. This is done with a “Section 85(1) Rollover Agreement”, which is a contract of sale between you and the corporation. You keep a copy, and a copy goes in the corporation’s minute book. Having a clear agreement on file is very important – the CRA likes to scrutinize these types of sales closely in order to head off tax evasion.

There are two main parts to the rollover agreement – the sale contract, and the financial terms – mostly the value of the assets, and the shares they’re being exchanged for. The sale contract should cover the following points:

  • Agreement to buy and sell
  • Shares and other compensation issued in return
  • Agreement to make a joint election to defer the capital gain under Section 85 of the Income Tax Act
  • Price adjustment clause – in case the CRA decides that the value of the assets is different than you say it is
  • Representations and warranties – that you and the corporation have the legal capacity to buy and sell the assets
  • General provisions – about how the contract is to be interpreted, and so forth

You can find examples on the interweb – Appendix A or B of this article here is a good starting point – though I don’t recommend trying to do this without legal and tax advice. The consequences of screwing it up could cripple your business if you don’t have the cash to pay the tax bill.

The financial terms – usually laid out in a table as an attachment to the contract – can get tricky. The CRA deems the assets of the business to be sold at fair market value. Some assets – especially goodwill – are hard to value. Others have depreciated or grown in value since you got them. Other assets might have a constant value, or cost nothing to acquire, but still generate income. The same goes for liabilities – though typically you don’t transfer many, if any, liabilities in these sales. You should get your accountant to value the assets, and determine the sale price of each class – or the “Elected Amount”. In the contract, you can set a price for each “class of assets” as a group, rather than breaking it down for each item. Still, your accountant should keep the working papers used to determine the amounts declared, in case the CRA asks for justification.

Typically, the following classes of assets will be sold:

  • Non-Depreciable Capital property
    • Some securities or investments
    • Some real estate
    • Trademarks
    • Some patents
  • Depreciable property – property with a definite useful life
    • Furniture, equipment, electronics, tools, spare parts
    • Vehicles and accessories
    • Buildings and the systems in them (HVAC, plumbing, electrical, etc)
    • Fixtures
  • Eligible capital property
    • Goodwill – reputation, customer lists, business name
    • Some securities or investments
    • Incorporation costs
    • Some patents
    • Non-real estate inventory

 3. Joint Election

No, I don’t mean the big issue in the next Federal campaign. It’s actually just more paperwork. Once the rollover agreement is all done and signed, the final step to deferring the capital gain is to file an “Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation.”

This riveting document is the CRA’s Form T2057. It uses much of the same information from the rollover agreement. It’s best to get your accountant to help you fill it out. The CRA will scrutinize the rollover closely. If you screw it up, you can amend the election form, but you can’t revoke an election once it’s filed.

Conclusion

That’s a lot of stuff to deal with for what seems like it should be a simple process. I strongly recommend that you don’t try this at home. It’s a tax-driven transaction – which means that your accountant should be calling the shots on the financial terms, and your lawyer should be papering the details. It’s usually a modest legal and accounting bill, which can protect you from an ugly capital gains tax bill, and the interest and penalties that come with it. Lawyer up!

Good luck out there!

 

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

Termination Pay – Firing Without Cause

Firing employees is among the least comfortable tasks that face business owners. Whether it’s a result of poor quality of work, conduct in the workplace, budget cuts, or restructuring, dismissing an employee is rarely a decision that’s made easily.

Employees can be let go for a reason – poor work quality, dishonesty, fraud, disciplinary issues – known as dismissal “for cause.” I’ll cover dismissal for cause in another article.

In Ontario, the Employment Standards Act, 2000, or ESA, sets the minimum standard for employee rights. It protects workers from unfair actions by employers. It is a “one size fits all” law, meaning that it imposes the same rules on small businesses as it does on Fortune 500 companies. On top of the complexities in the written law, the courts have fleshed out certain “common law” rules. Breaking those rules can mean paying big financial penalties for bad faith conduct, and a whole lot of time and heartache spent fighting lawsuits.  You should always consult with a lawyer before letting an employee go, just to make sure you’re not exposed to extra risk. You may pay more to the employee and your lawyer up front, but you can avoid a costly court case.

Dismissal Without Cause

If an employee is being let go without cause – due to the sale or merger of the business, budget cuts, or in a restructuring for example – the ESA requires employers to give a reasonable notice period. The employer may:

  • give written notice of dismissal and require the employee to work through the notice period while allowing them to search for new employment, or
  • terminate them immediately and pay their salary and benefits for the length of the notice period

Fixed Notice

Some employment contracts, particularly for management, will dictate a specific amount of notice that is required, such as:

The employer shall be entitled to end the employment relationship at any time, without cause, and at the employer’s discretion. Should the employer dismiss the employee without cause, the employee shall be entitled to payment of four months’ notice or pay in lieu of notice, including benefits.

If the employee is let go without cause, the employer must pay this amount without conditions such as requiring a release. A failure to pay, or an attempt to reduce the amount payable could be seen as bad faith, and could result in a big damages award against the employer.

Even if the employee mitigates their damages by finding another job right away, they’re still entitled to receive the full amount of damages.

ESA Minimum Notice

Many employment contracts state simply that:

The employer shall be entitled to end the employment relationship at any time, without cause, and at the employer’s discretion. Should the employer dismiss the employee without cause, the employee shall be entitled to the minimum notice or pay in lieu of notice, including benefits, required by the Employment Standards Act, 2000.

The general rule of thumb is one week of notice for every year of service is the starting point. Bear in mind, however, that this is only a minimum. Courts can award additional notice based on age, long-service, or their duties (managers or supervisors are often entitled to more notice) based on the common law, below. This is where your lawyer earns his keep – looking at the circumstances, and helping you to determine a reasonable notice period.

Bonuses and other discretionary benefits are tricky, and must be dealt with on a case-by-case basis.

Common Law Notice

If there is no notice provision in the contract, or a court finds that the ESA minimum would be unfair in the circumstances, the common law will apply. What a “reasonable” notice period is depends on the circumstances. Courts will decide the appropriate notice period based on a number of factors, including the employee’s age, length of service, and their role and responsibilities at the company. Again, this is where your lawyer earns his keep in helping you to determine what a reasonable amount of notice would be.

The above is a big picture view of what the law requires employers to consider when letting an employee go without cause. As usual, it’s for your information only, and no substitute for a discussion with a lawyer. I happen to know a guy…

Mike Hook
Intrepid Lawyer
@MikeHookLaw

Non-Competition Agreements in the sale of a business

So, there I was, the dapper lawyer at the cocktail party, entertaining everyone with tales of legal derring-do. All were enthralled by my war story about finding a type-o on page 64 of a contract. “Tell us another!” shouted one. “Yes! Yes! Tell us a tale about something exotic! Something like… non-competition agreements!” demanded another, excitedly. I couldn’t help but to oblige.

Lucky for them, I’d just read the recent decision of the Ontario Court of Appeal where they’d just clarified the law about what makes a non-competition agreement enforceable after a business has been sold. (If you’re a nerd like me, you can read the whole decision here: Martin v. ConCreate USL Limited Partnership, 2013 ONCA 72).

This decision laid out the law on what makes for an enforceable non-compete agreement very clearly. Here are the basics:

  • We start with the presumption that a non-competition agreement is not enforceable, because it’s designed to restrict someone’s freedom to practice their trade.
  • Whoever is trying to enforce a non-compete has to show that it’s a reasonable agreement between the parties.
  • Non-competes in the sale of a business will be less scrutinized than those between employers and employees, as there’s usually equal bargaining power in a sale of a business.
  • Agreements that are signed by people who had legal advice on the agreement before signing it are more likely to be enforceable.
  • Just because it’s a sale of a business and both parties had legal advice doesn’t mean that an unreasonable agreements will be enforceable
  • A reasonable non-competition agreement will be clear, and unambiguous in three major areas:
    • The geographic scope, or area in which the non-compete applies, must be defined clearly
    • The time period that the agreement covers must be reasonable, and have a clear start and end point – and not be tied to a future event that is outside the power of the parties to control (or may never happen…)
    • The activities that are prohibited must be clear and reasonable – only what’s necessary to protect the business interests of the purchaser

A non-compete is a valuable tool to protect a new purchaser from having to fight for business against someone who has insider information on how the purchased business is run. Theoretically, if the vendor is allowed to start a new business in the same area that’s a little leaner, they could undercut the purchaser and put them out of business. The non-compete is designed to prevent this – but is only to the minimum extent necessary.

Of course, I explained to the spellbound crowd, what’s “reasonable” in any case really depends on the circumstances. Non-competition agreements or clauses are the type of thing you should get legal advice on before sticking them in any agreement – especially the sale of a business!

I’m available for legal advice or children’s parties, should ever you need me.

Happy Thanksgiving!

Mike Hook
Intrepid Lawyer
mike@intrepidlaw.ca
@MikeHookLaw