A capital gain is the increase in the monetary value of property such as shares, bonds, land, antiques, or any other assets that can generate a profit when the property is sold.

Depending on your country of residence, you may have to pay tax on your capital gains, but you may also be able to benefit from a cumulative exemption for capital gains. In Canada, this deduction is available for certain types of capital gains, including those acquired through the sale of qualified small business corporation shares or through the sale of qualified farm property. For individuals who are residents of Canada, this capital gains deduction is set at a lifetime amount of $800,000 (indexed from 2015, so that for the tax year 2019, for example, the amount increases to $866,912). In the case of qualified farm or fishing property, the deduction is for one million dollars without indexation.

The confidentiality agreement prohibits the divulgation of any confidential information (financial results, important contracts, lists of clients) provided to the buyer in the context of due diligence and negotiations related to the sale or purchase of the business.

According to the International Cooperative Alliance:

“A cooperative is an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise.” (Source: International Cooperative Alliance)

Due diligence can be carried out by a public accountant or by a lawyer. Its main purpose is to determine the real value of a business. For the incumbent, it provides an assessment of the operations and the financial situation of his or her business. For the successor or buyer, it provides a way of verifying the truth of the incumbent’s statements about the business. In addition, it also makes it possible to ensure that the business has no hidden defects. Due diligence usually covers the following areas: the operations of the business, its intellectual property, its human resources, and any other assets belonging to the business, as well as any related legal, accounting, tax, or environmental issues. Due diligence is highly useful during the negotiations over the sale or purchase of a business.

This is a type of transaction where a firm (a business) is purchased by its employees or by some of its managers:

  1. Without changing its legal form: most often a corporation or a company – Employee Buy-Out or Management Buy-Out;
  2. With change of legal form: for example, conversion into a cooperative – Collective Business Buy-Out;
  3. With addition of legal forms: for example, a cooperative of worker shareholders buying a part of the company.

Equity is the net value of a business, including the value of the common and preferred shares held by the owners and the value of the retained earnings.

The equity of a business is equivalent to the financial resources that it legally possesses and that mostly come from funds invested by its shareholder(s), in exchange for shares held by the owners, and from funds resulting from earnings that have been conserved by the business (retained earnings).

When a business is sold or transferred, the value of the shares belonging to the managing director is assessed and set as the value of these shares at a specific point in time. The managing director’s shares then receive a new definition, and there is a redistribution of the equity among the new owners of the business.

Several methods are used to execute an estate freeze, and each one has specific characteristics. The “classic” method consists in transferring the managing director’s shares to a management company that then becomes the owner of the business. The management company issues new, non-participating shares to the managing director in exchange for his or her previous shares. The value of these new, non-participating shares will be equivalent to the value determined for the previous shares at the time of the estate freeze. Usually, the new, non-participating shares are controlling shares. The management company will also issue new participating shares to the designated beneficiaries of the estate freeze. These new participating shares are shares that will benefit from the increase in the value of the business in the future.

In setting the value of his or her shares as their value at the time of the estate freeze, the shareholder sets the amount of the capital gain that he or she will make on the new, non-participating shares. The tax on this capital gain will be payable at the time of the disposition of these shares.

This is the set of financial products, with specific terms and conditions of use, that ensures the financing of the transaction.

This a letter in which one party expresses his or her interest in transacting with the other party. For example, potential buyers may use this letter to indicate their interest in purchasing a business, and financiers may use it to indicate their interest in offering a certain type of financing. The provisions of a letter of interest do not usually include commitments by the parties, but they normally make it possible to establish the basis on which the parties enter into negotiations with a view to a final agreement.

This is a type of transaction where a buyer gains control of a business by taking out loans that are based on the borrowing capacity of the business being purchased. Usually, the assets of the latter are used to secure the loans taken out by the buyer. These loans are generally repaid using the liquidity of the acquired business. (Source: L. Ménard et al. (2004), Dictionnaire de la comptabilité et de la gestion financière, 2nd edition, CICA, Canada.)

This is a letter in which the parties commit to making a transaction if certain conditions are met. It usually specifies the price, the payment terms (including the payment schedule), and other conditions such as the possibility of obtaining financing, the execution of due diligence, the duration of the agreement, and the role that the current owner will play in the transfer (e.g., special advisor for a period of time, member of the board of directors, etc.).

An important clause in the contract for the sale of a business, it binds the seller with respect to certain key elements on which the buyer founded his or her decision to buy before the actual purchase. For example, it can relate to the accuracy of the financial statements presented, the validity of the licenses and contracts transferred, the ownership of assets, the divulgation of liabilities (including environmental liabilities), etc. It is combined with an agreement committing the seller, for a period determined by the two parties, to compensate the buyer in the case of inaccuracies in statements of fact.

The sales contract is a legal document that sets the terms and conditions of the agreement between the buyer and the seller. It is the result of sometimes long and arduous negotiations over the value of the business, the acquisition strategies, financing, the terms and conditions of the payment of the sales price, the warranties provided, the compensations related to the representation and warranties clauses, as well as over the agreements concerning the employees, the leases, the debt, the legal proceedings underway, and non-competition.

This is an agreement that is signed by (some or all) of the shareholders in a company and that specifies the terms and conditions of their partnership. Among others, it covers points such as signing authority, company decision-making and the shareholders’ exercise of the right to vote, the distribution of shares, the dilution of shareholding, tax incidence in the case of death or disability, shareholder withdrawal, the right of first refusal, the drag along right (or forced exit clause), the reverse drag along right, conflict resolution, and the commitment to non-competition, non-solicitation, and confidentiality.

When a firm (a joint stock company) has more than one shareholder, it is highly advisable for the shareholders to have a formal agreement (a contract) between them that establishes the general rules for the functioning and the organizational structure of the business, for the relations between shareholders, and for their contractual commitment to the firm. The goal of this agreement is to specify in advance the actions that must be undertaken in various situations. Thus, among other things, it describes the mechanisms for the withdrawal, the separation, and the expulsion of a shareholder that are used to avoid disagreements between shareholders.

Here are the definitions of some of the terms used in shareholder agreement:

  • Right of first refusal: This is a mechanism that grants a right of priority to other shareholders for the purchase of shares when a third party offers to buy them.
  • Drag along right: This is a right granted to majority shareholders that obliges minority shareholders to sell their shares to a third party if the purchase offer of this third party is for the acquisition of a certain percent (often 100%) of the company’s shares.
  • Reverse drag along right: This is a right granted to minority shareholders that obliges a third party to purchase the shares of a minority shareholder when the purchase offer of this third party is for the acquisition of a certain percent of the company’s shares.

To learn more, visit the Desjardins webpage “What is a shareholder agreement” or see the information brochure for entrepreneurs (in French), “Votre convention entre actionnaires,” which the Fondation du Barreau du Québec published in collaboration with Éducaloi in 2016.

Nathalie Gagnon and Caroline Lapointe, (BCF s.e.n.c.r.l.), “Convention entre actionnaires et stratégies de transfert d’entreprise,” APFF, November 27, 2003.

The shareholder structure refers both to the group of shareholders and to the categories of shares in a business (common, preferred, multiple voting, etc.)

A subscription agreement is a commitment that an investor makes to buy securities (usually shares) that a firm intends to issue. This agreement also includes a representations and warranties clause.

A trust is an estate created, among other things, to allow a managing director (the previous owner) to entrust the future plus-value of his or her shares to administrators (trustees) on behalf of beneficiaries that he or she designates. Trustees must act in accordance with the conditions and wishes stated in the governing document for the trust.

In a family trust, often called a discretionary trust, the current managing director can freeze (see the section on estate freezes below) the value of his or her shares and steer any future plus-value to the trust. Managing directors usually name themselves, their children, their spouse, or even their grandchildren as beneficiaries.

The relationship between the trustees and the beneficiaries is governed by the Code civil du Québec. The latter grants the trustees real control of the assets, but it stipulates that the latter must be administered in the best interest of the beneficiaries. In accordance with the wishes of the managing director, the trustees determine the proper time and place for the distribution of the revenue generated by the assets and for the distribution of the assets themselves.