How do I transition a family business through a sale?

A sale of a family business to a relative uses the same legal tools as a sale to a stranger: a structure, a purchase agreement and a closing. Treadstone Law, an Ontario firm, says in its guidance on family sales that a family buyer does not change those mechanics, though it often changes the tone of the negotiation. The extra work lies where family relationships meet the legal steps.

Choose a structure and count the shareholders

In a share sale each shareholder decides about their own shares, so every relative who holds shares has to be dealt with. In an asset sale the corporation sells, and a sale of all or substantially all of its property outside the ordinary course needs shareholder approval under both the Canada Business Corporations Act and Ontario’s Business Corporations Act. A shareholder who complies with the statute’s dissent procedure is entitled to be paid the fair value of their shares, under both Acts and subject to limits in those sections. Under the federal Act every share carries a vote on that approval, even a share that does not normally vote, which matters where relatives hold non-voting shares.

Document the price and how it is paid

A family successor may pay part of the price over time. BDC describes vendor financing and an earn-out as ways for the seller to remain involved, and says that in a family succession or management buyout a valuation report can also be useful for discussions about the sale, or in later dealings with tax authorities. If the seller is paid over several years, the CRA says a capital gains reserve may let the gain be reported as the proceeds are received.

Employees

Staff who work in the business are affected by the sale whether or not they are relatives. In Ontario, the Employment Standards Act, 2000 says that when an employer sells a business or a part of a business and the purchaser employs an employee of the seller, the employee’s employment is deemed not to have been terminated or severed for the purposes of that Act, and the employment with the seller is deemed to have been employment with the purchaser for any subsequent calculation of length of employment. Under subsection 9(2) of that Act, this does not apply if the day the purchaser hires the employee is more than 13 weeks after the earlier of the employee’s last day of employment with the seller and the day of the sale. Other provinces have their own employment standards laws, so check the one that applies.