How do I sell my business to investors?

An owner who asks how to sell a business to investors may be describing one of three things: selling all of it, selling part of it, or bringing in money in exchange for shares. The legal path differs for each. What changes the analysis most is whether investors buy shares you already hold or new shares the company issues, because issuing securities to the public or to a group of investors engages provincial securities law. This guide explains why that law matters, what an exemption involves, and what investors take on when they buy shares, so that you can have a precise first conversation with a lawyer.

Decide what you are offering

Selling all or most of the business to one investor group is closer to an ordinary sale; raising money from several investors for part of the company is closer to a financing. If you are unsure whether you want to sell at all, see Should I bring in a partner or investor instead of selling my business?. The answer shapes who must sign, what documents you need and whether securities law has to be dealt with before you speak to the first person. Write down the share of the company you would give up, the role you want afterward and what the investors are being asked to receive. Also note whether any existing shareholder, lender or agreement must be consulted first, since a signed shareholder agreement can limit what you may offer and to whom.

Issuing shares can be a distribution

Under section 53(1) of Ontario’s Securities Act, no person or company shall trade in a security if the trade would be a distribution of the security, unless a preliminary prospectus and a prospectus have been filed and receipts have been issued for them by the Director, subject to the prospectus exemptions. The Act’s definition of distribution includes a trade in securities of an issuer that have not been previously issued, and a trade in previously issued securities from the holdings of any control person, so selling shares you already hold can be caught too. Ontario is one example; ask your lawyer which province’s or territory’s securities law governs your offering. Whether a particular sale is a distribution is a legal question, so do not approach investors until a lawyer has answered it.

Exemptions and the report that follows

Securities regulators publish National Instrument 45-106 Prospectus Exemptions, which sets out exemptions from the prospectus requirement. The Canadian Securities Administrators say that issuers and underwriters that rely on certain prospectus exemptions to distribute securities are required to file a report of exempt distribution on Form 45-106F1 within a prescribed timeframe set out in that instrument. Relying on an exemption therefore does not mean there is no paperwork. Ask your lawyer which exemption fits your investors, what each investor must confirm, and what must be filed and by when.

What investors take on in a share sale

The Saskatchewan Workers Compensation Board describes a share sale as one where the assets and liabilities of a company remain with that corporation. Investors who buy shares therefore become owners of a company that keeps its history, including its debts, contracts and unresolved claims. Prepare to answer questions about all of it. BDC says you will need a lawyer familiar with business transitions to supply information to buyers during due diligence, negotiate the purchase agreement and address any legal issues that arise. Gather your records before the first meeting, so the answers match what you have told people.

Keep information protected

BDC says that to pursue discussions with a seller it is customary to sign a confidentiality agreement and write a letter of intent. As the seller, ask for the confidentiality agreement before you share detailed records with any investor, and keep a list of who has received what. A pitch that goes to several investors can reach employees, customers or competitors, so decide whether to describe the company without naming it at the first stage. Any statement in a pitch deck about results or prospects should be accurate and supportable.

Plan the process with your advisers

Investor sales draw on several professions at once. Ask your lawyer to handle the securities question and the purchase or subscription agreement, and your accountant to prepare the financial statements investors will read and advise on the tax result for you and the company. If investors will come from outside your province or country, ask the lawyer whether other rules apply there. Agree a sequence before any outreach: who approaches whom, what is said, when records are released, and who decides. A short written plan prevents contradictory statements to different investors later.

• Are investors buying shares you hold, or new shares the company will issue?
• Which province’s securities rules apply to your investors, and is a prospectus exemption available?
• What must be filed after the sale, and by when?
• Who signs a confidentiality agreement before receiving records?
• Which liabilities of the company will the investors inherit and what do they need to see?

For the wider question of timing, see When to sell your business.