Purchasing a professional practice can be an exciting time for the purchaser, but it can also be an overwhelmingly complex and time-consuming endeavour if you don’t engage the right people to guide you through the process. There are many important business and legal considerations to keep in mind when considering whether to purchase a practice.
There are two primary methods of structuring the purchase and sale of a professional corporation:
- Share purchase, whereby the purchaser buys the shares of the professional corporation that owns the assets and operates the business; or
- Asset purchase, whereby the purchaser buys the underlying assets of the professional corporation.
Determining the proper structure of the transaction will be strongly influenced by legal and tax implications, as well as various business considerations. The details and considerations of each transaction are unique and it is important to engage experienced tax and legal professionals to help determine the most appropriate structure.
Regardless of the structure of the transaction, purchasing a practice is a complicated process, that if not done properly can end up costing you a lot of extra money and leave you open to unexpected liabilities. When it comes to purchasing a professional practice, there are several considerations to keep in mind, including the following:
- Due diligence. The purchaser will need to conduct proper due diligence of the practice, which is a critical part of any purchase transaction. Depending on the structure of the transaction, this will typically include equipment inspection, financial review, lease review (if there is one), and due diligence of the business, patients, assets etc. There may be some issues that reveal themselves during the due diligence process that will need to be properly dealt with prior to close and addressed in the purchase and sale agreement.
- Finances and debt tolerance. The most traditional and common way of financing the purchase of a practice is typically through a bank loan. However, there are multiple ways to finance a transaction, but for the sake of this blog post, we won’t go into details about these various options. It is always advisable for the purchaser to review and discuss various financing options with its professional advisors. It is very important to have an experienced accountant involved to review the financial statements of the corporation and ensure that the valuation and proposed purchase price are well supported by the financial condition of the practice.
- Limitation of liability prior to the closing date. In a share sale, the purchaser is acquiring the corporation in its entirety with all of its history and potential liabilities. Due diligence is helpful in identifying any potential issues that may be concerning for the purchaser (for instance breach of a significant contract of the target corporation, outstanding litigation claims, or the termination of an employee which may result in liability, as examples). The purchaser will try and limit its exposure to these liabilities by requiring the seller to provide representations and warranties about the business and the corporation in the purchase and sale agreement. The purchaser will want the seller to be responsible for any claims relating to activities in the business that occur prior to closing, whether the seller is aware of them or not.
- Employment and associate agreements. Termination costs will be a key factor in valuing a professional practice and having employment agreements in place with enforceable termination clauses is essential to avoid unwanted liability down the road. Associate agreements should include a properly worded non-solicitation clause that prevents the associate from soliciting patients/clients of the practice if they leave and practice elsewhere.
- Employee liabilities. Regardless of whether the transaction is structured as a share purchase or an asset purchase, it is very important to determine how the parties will handle the employment-related liabilities of the professional practice.
The above points are just a few of the considerations to keep in mind when preparing to purchase a professional practice. For the purposes of this post, we will focus on employment-related considerations and employee liabilities involved in the purchase of a professional practice.
When you are preparing to purchase a practice, it is important to not forget about the employees!
Who will bear the burden of employee entitlements upon termination has increasingly become a major negotiation issue when purchasing a business. In our experience, these costs can be so high that they alone are enough to prevent some purchasers from proceeding with a sale.
Employment considerations when purchasing shares
In a share purchase, the purchaser buys the shares in the capital of the corporation that owns the assets and operates the business. In a share sale, the corporation’s assets are not legally transferred to the new owner as the assets and liabilities stay with the corporation; however, the shares of the corporation that owns the assets (and liabilities) are sold and the corporation undergoes a change of control. As a result, the contracts, including employment agreements, stay with the corporation, and it is not necessary to specifically transfer these agreements or enter into new agreements with the buyer. Importantly, in a share purchase the employer does not change.
When it comes to the practice’s employees, their employment contracts are not terminated when the shares of the business are sold, unless the parties specifically make an agreement requiring the seller to terminate the employment of the employees prior to closing and pay any associated termination costs. This can be a costly endeavour, especially if the target corporation does not have enforceable termination clauses in its employment agreements (if there even are written employment agreements at all) and the corporation employs long-service employees. In other words, unless the parties specifically agree otherwise, the purchaser assumes most of the employee liabilities when they purchase the practice. It is important to review the details of the employment of each employee when purchasing a practice, as well as evaluate any potential termination costs that you may be responsible for should you decide to terminate an employee at some point in the future, once the transaction has already closed. In particular, the purchaser is going to want to review the employment agreements for all employees and obtain detailed information about each employee’s compensation, which may include, among other things, their current wage rate, vacation entitlements, paid sick/personal time, other paid leaves of absence, bonuses and other incentive entitlements, uniform/vehicle/cell phone allowances, etc.
Employment considerations when purchasing assets
In an asset purchase (i.e. where some or all of the assets of a corporation are purchased), the purchaser is able to choose the assets and liabilities it wishes to take on. Importantly, the employees do not automatically transfer to the purchaser.
As a result, it is up to the purchaser to determine which employees, if any, it wishes to offer employment to, and, in turn, it is up to the employee to accept, or decline, that offer.
This means, among other things, that if the employees are not being offered employment by the purchaser, the seller will have to terminate the employment of its employees and pay the associated termination costs.
Conversely, if the purchaser wants to keep the employees, it should have its employment lawyer prepare offers of employment for the employees, with enforceable termination provisions, in order to limit liability down the road. When electing to assume the employees, the purchaser will, in most circumstances, assume the employee’s previous years of employment for the purpose of calculating the employee’s length of service for the purposes of the Employment Standards Act, 2000. This means, among other things, that an employee’s vacation and termination entitlements are calculated based on their years of service with both the seller and purchaser. If an employee chooses not to accept employment with the purchaser, the seller will be responsible for the associated termination costs.
If you have questions about or need assistance purchasing a professional practice, please reach out to Katherine Serniwka in Siskinds’ Professionals Practice Group.
If you have questions about or need assistance with understanding the potential employment-related liabilities and how to avoid them when purchasing a professional practice, please reach out to any member of Siskinds’ Labour & Employment Law Group.
* Note: this blog post does NOT discuss selling a business with a unionized workforce, as different rules apply.