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Professional Standards Manual

III. Trading Services

Sale Of A Business

(a) Sale of a Business under the Former Real Estate Act

Under the former Real Estate Act, the sale of ‘‘a business and the goodwill and assets of it’’ with or without a real estate component, was included in the definition of ‘‘real estate’’. As such, assisting in the sale of a business was an activity for which a real estate licence was required and deposit monies had to be held, in trust, by brokerages, in accordance with section 16 of the former Real Estate Act.

Under the new Real Estate Services Act, the sale of a business is not included in the definition of ‘‘real estate’’ and the requirement for licensing under the Act depends on whether the sale of a business includes a real estate component (i.e., includes the sale or lease of real property, including an assignment of a lease).

(b) Sale of a Business under the new Real Estate Services Act

(i) Sale of a business by assets

The sale of a business by assets that includes a real estate component (i.e., includes the sale or lease of real property, including an assignment of a lease) is an activity that requires a real estate licence. A real estate licence is not required where the sale of a business by assets does not include a real estate component.

(ii) Sale of a business by sale of shares of a corporation

In a share transaction, all of the assets and liabilities of the corporation are in effect the indirect subject matter of the transaction, since the buyer is buying the shares of the corporation which owns the assets and is responsible for those liabilities. The Courts have determined that where there is:

(a) a purchase of 100% of the issued and outstanding shares in the capital of a corporation, the buyer is in effect acquiring an interest in the underlying property of the corporation; or

(b) a purchase of less than 100% of the issued and outstanding shares in the capital of a corporation, the buyer does not acquire an interest in the underlying property of the corporation. As a result:

(i) if the transaction involves the acquisition of disposition of 100% of the issued and outstanding shares in the capital of a corporation that has a real estate component (sale or lease of real property, including an assignment of lease), a real estate licence is required by third parties providing trading services in relation to the transaction; i.e., this is considered a trade in real estate;

(ii) if the transaction involves the acquisition of disposition of 100% of the issued and outstanding shares in the capital of a corporation that does not have a real estate component (sale or lease of real property, including an assignment of lease), a real estate licence is not required by third parties providing trading services in relation to the transaction; i.e., this is not considered a trade in real estate; or

(iii) if the transaction involves the acquisition of disposition of less than 100% of the issued and outstanding shares in the capital of a corporation regardless of whether or not it has a real estate component (sale or lease of real property, including an assignment of lease), a real estate licence is not required by third parties providing trading services in relation to the transaction; i.e., this is not considered a trade in real estate. The British Columbia Securities Act applies to all trading (or selling) of securities (including shares). The Securities Act requires a person to be registered under the Securities Act and to file and obtain a receipt for a prospectus from the British Columbia Securities Commission before trading securities. There are a number of exemptions available from these registration and prospectus requirements, but a person using these exemptions must follow specific conditions.

Licensees are cautioned to seek legal advice, or contact the British Columbia Securities Commission, prior to listing and marketing securities to determine whether there is an exemption from the registration and prospectus requirements of the Securities Act that fits their circumstances.

(c) Compliance with the Real Estate Services Act

Licensees are cautioned that before proceeding with the sale of a business, brokerages and licensees must determine whether the transaction includes a real estate component in circumstances where there is a sale of assets or the sale of 100% of the shares of the corporation owning the business. If there is a real estate component and a licence is required in these circumstances, the licensee must comply with the provisions of the Real Estate Services Act.

(d) Disclosure Obligations and Deposit Requirements

If there is no real estate component in the sale of a business by assets or sale of 100% of the shares of the corporation that owns the business, or in circumstances where there is the sale of less than 100% of the shares, licensees must advise the party that engages the licensee to list and sell the business that they are not acting as a licensee and that the licensee is not regulated under RESA in relation to the sale, including holding the deposit. This advice would also be applicable if licensees are involved in the sale of a business that initially involves the sale of assets with a real estate component which would require a real estate licence but subsequently changes to the sale of less than 100% of the shares of the corporation owning the real estate which would not require a real estate licence. Section 27(5) of RESA provides that a brokerage must ensure that no money, other than money held in relation to real estate services, is paid into its brokerage trust account. This would, for example, exclude a deposit in relation to the sale of a business by assets or the sale of 100% of the shares of the business without a real estate component or a deposit in the sale of a business by way of less than 100% of the shares. Deposits in these circumstances would have to be held in a separate trust account other than the brokerage’s statutory trust account.

(e) Exemption from Licensing

The Regulations provide that an accountant, who is authorized to practice public accounting as a CA, CGA, or CMA and who provides trading services in relation to the purchase and sale of a business, is exempt from the need for licensing as long as both the purchase and sale and the trading services arise in the course of the practice of public accounting.

(f) Form of Contract

The standard residential Contract of Purchase and Sale is to be used for residential sales only, not for sales of businesses. Licensees should obtain professional advice from lawyers and accountants regarding the form of a contract. Suitable forms may be available for commercial transactions from board/association offices.

The standard residential Contract of Purchase and Sale addressed the matter of subjective clauses by including a provision that the seller’s acceptance was irrevocable and providing that the contract was signed under seal. Because the standard residential Contract will not be used for a commercial transaction, licensees should consider whether the subject clauses used in the contract are overly subjective. Licensees should review the section regarding ‘‘ Contracts under Seal’’.

It is recommended that all offers be written subject to the approval of the seller’s lawyer and the buyer’s lawyer and accountant within a specific time limit.

Approval by Seller’s/Buyer’s Lawyer Clause

Subject to (select either Seller’s or Buyer’s) lawyer approving the terms and conditions of the contract on or before (date) .

This condition is for the sole benefit of the Seller/Buyer.

Approval by Seller’s/Buyer’s Accountant Clause

Subject to the Buyer’s accountant approving the financial statements on or before (date).

This condition is for the sole benefit of the Buyer.

(g) Relevant Documents

Although the sale of a business that includes real property is governed by RESA, neither RESA, the Regulations nor the Rules stipulate what documents must be provided by the seller.

A prudent licensee will ensure that all the appropriate documents are obtained for review by a prospective buyer.

The following clauses are designed to assist licensees in obtaining important financial and other information from the seller:

If the financial statements are not available, a licensee should advise the buyer to obtain professional advice from an accountant.

Buyer To Approve Documents in Sale of Business Clause

Subject to the Buyer receiving, perusing and being satisfied with:

(a) a profit and loss statement showing the revenue and expenses of the business for a period of 12 months ending not more than 120 days before the signing of the agreement;

(b) a statement of assets and liabilities; and

(c) a statement containing a list of fixtures, goods, chattels, rights and other assets relating to or connected with the business that are not included in this transaction, on or before (date) .

This condition is for the sole benefit of the Buyer.

Sale of Small Business Clause

The Buyer is buying the (select either assets or shares) of the business known as (name of business) and located at (location) , B.C.

Purchase price includes all assets, goods and chattels listed as included in the sale of the business, according to the attached schedule, except inventory on hand.

Subject to the Buyer receiving and approving the list of assets on or before (date) .

This condition is for the sole benefit of the Buyer.

NOTE: The decision as to whether assets or shares are being purchased should be made with an accountant’s advice.

(h) Inventory Valuation

The inventory of the business is often purchased separately from the purchase of the business itself. The method for valuing the inventory should be referred to the parties’ advisers and a valuation date agreed upon by the parties prior to entering into the Contract of Purchase and Sale.

Licensees must be aware of the problem associated with inventory. It is important to seek the guidance of those experienced in evaluating inventory.

Some concerns are described in the following examples:

  • shoe stores: stock on hand includes not only current styles, but also boxes of out-of-fashion shoes;
  • grocery stores: stock includes large amounts of time-dated products and foods;
  • florist shops: stock includes aging, wilting, and dying flowers;
  • gift stores: stock includes items that a buyer is not interested in buying at all or for which he or she does not see a market; and
  • lawn mower and small engine repair shops: stock includes boxes of parts for old and obsolete engines.

One of the differences between residential and business/commercial transactions is that often the parties involved in the transaction are far more knowledgeable than the licensees in the operation of the particular business and, more than likely, meetings and discussions have taken place previously between the parties. Frequently, the function of the licensee is to put into an agreement format those things that have already been discussed and agreed to by the parties.

The contract must state clearly whether or not the price includes inventory. The following clause can be used:

Inventory Clause

Purchase price(select either includes or does not include) (select either inventory or stock) .

This offer is conditional on the Seller and Buyer and their respective advisers establishing an agreed method for the purpose of valuing the inventory/stock. This agreement is to be in place and in writing within (number of days) days of acceptance of this offer. Inventory/Stock taking is to be performed within (number of days) days before the completion of this transaction. The Seller will allow reasonable access to the Buyer for purposes of reviewing the inventory for purposes of this condition.

This condition is for the benefit of both the Buyer and the Seller.

If the business is occupying leased space, the following clause should be inserted in the contract:

Lease of Premises Clause

Subject to the Buyer being able to arrange on or before (date) a lease for the premises satisfactory to the Buyer.

This condition is for the sole benefit of the Buyer.

OR

The Buyer will assume all payments, obligations and covenants of the existing lease covering the business premises.

Subject to the Buyer receiving, perusing and being satisfied with the said lease on or before (date) .

This condition is for the sole benefit of the Buyer.

OR

The Buyer will assume all payments, obligations and covenants of the existing lease covering the business premises.

Subject to the Buyer receiving approval of the lessor to such assumption on or before (date) .

This condition is for the benefit of both the Seller and the Buyer.

Subject to the Buyer receiving, perusing and being satisfied with the said lease on or before (date) .

This condition is for the sole benefit of the Buyer.

Adequate time must be allowed within the contract for the buyer to receive the documents and review them. A specific date on the contract for the provision of the documents to the buyer by the seller, in addition to the date for their acceptance, is recommended.

(i) Sale of Franchise Requires Real Estate Licence

Subject to the licensing exemptions, a sale of a franchise as an operating business, whether sold on behalf of the franchisor or of the franchisee, is governed by the requirements of RESA if the business also includes the sale or lease of real property.

Buyer Approving Franchise Agreement Clause

Subject to the Buyer receiving, perusing and being satisfied with the franchise agreement on or before (date) .

This condition is for the sole benefit of the Buyer.

The licensee should allow time on the contract for the seller to provide the documents to the buyer and to allow the buyer time to review them.

Franchisor Approving Assignment of Franchise Clause

Subject to the franchisor’s written approval of the assignment of the franchise on or before (date) .

This condition is for the benefit of both the Buyer and the Seller.