How do I sell a service business?

A service business sells people’s time and relationships. If there is little equipment to hand over, what the buyer is acquiring is mainly the staff, the client relationships and the contracts. That shapes how to sell a service business. The Business Development Bank of Canada notes that a change in business ownership can be disruptive for employees, customers and suppliers. Plan for that from the start, and prepare answers to the questions a buyer may ask about who does the work, who the clients are and what happens to them when you leave. The sections below cover the main practical points.

Plan for staff and clients before you list

Decide who in the business a buyer will want to keep, and talk to your advisers about how and when to tell them. Check whether key staff have written employment terms and whether client relationships depend on you personally. Ask yourself which clients would stay if you left tomorrow. If a buyer asks the same question, have a written plan for the handover, including your own transition period, ready to show. Decide who tells clients and suppliers about the sale, and when, so nobody hears it first from a competitor. Write down how the work is delivered, with checklists, templates and account notes, so that the know-how sits in the business and not only in your head.

Share customer information carefully

If a buyer asks to see client lists and billing history, information in them about identifiable individuals is personal information, and the federal privacy law, PIPEDA, speaks to it. Section 7.2 says that, in addition to the circumstances set out in subsections 7(2) and (3), organizations that are parties to a prospective business transaction may use and disclose personal information without the knowledge or consent of the individual if conditions are met. One is an agreement requiring the organization that receives the information to use and disclose it solely for purposes related to the transaction, to protect it by security safeguards appropriate to its sensitivity and, if the deal does not proceed, to return or destroy it within a reasonable time. The information must also be necessary to decide whether to proceed and, if the decision is to proceed, to complete the deal. Under s.7.2(4), these rules do not apply to a transaction whose primary purpose or result is the purchase, sale or other acquisition or disposition, or lease, of personal information. PIPEDA allows exemptions where a province has substantially similar legislation, and Quebec has its own private-sector privacy law, so check which applies to you. In practice, ask the buyer to sign the agreement first, share only what each stage of the review needs, and hold back names and contact details until the buyer is serious.

Check which contracts can move

Your client and supplier contracts are part of what you are selling, so find out whether they can pass to a buyer. Treadstone Law, an Ontario firm, explains that in an asset sale contracts do not just come along for the ride: a contract’s benefits may be assigned to the buyer, but the other party must consent where the contract says consent is required. In a share sale, the firm says, the contracting corporation does not change and its existing contracts continue with it, though a contract with its own change-of-control clause can still trigger the other party’s consent or notice rights. Read the assignment and change-of-control clauses in your major agreements, and ask your lawyer to list the consents you will need. Leases and licences deserve the same check. Where a client can end a contract on short notice, tell the buyer, because it affects what the buyer is really acquiring. Do not wait for the buyer to find these in due diligence.

Employees and the sale in Ontario

The rule below is Ontario’s. Ontario’s guide to the Employment Standards Act says that where there is a sale of a business and an employee of the seller is hired by the purchaser, the employee does not start as a new employee for certain Act entitlements but gets credit for past employment. It also says the earlier employment is not credited if the employee is hired by the new owner more than 13 weeks after the employee’s last day of employment with the seller or the day of the sale, whichever is earlier. Other provinces run their own regimes, so ask an employment lawyer what applies where your staff work. Ask also whether any staff hold licences, certifications or security clearances that are personal to them and do not transfer with the business, and if so, tell the buyer early.

Ask about GST/HST on the sale

Under section 167 of the Excise Tax Act, where a supplier supplies a business or part of one and the recipient is acquiring ownership, possession or use of all or substantially all of the property that can reasonably be regarded as necessary to carry on the business, the supplier and recipient may, except where the supplier is a registrant and the recipient is not, and subject to the section’s other conditions, make a joint election in prescribed form. Where the election is effective, tax is not payable on most supplies under the agreement, with listed exceptions. Whether your sale qualifies depends on what is being transferred, so ask your accountant early.

• A list of staff, their roles and who holds each client relationship
• Written terms for key employees, and a plan for telling them
• Client and supplier contracts, with assignment and change-of-control clauses marked
• A confidentiality and data-handling agreement before you share client information
• Your accountant’s view on the GST/HST election and how the sale is structured