For years we have known that Canada is an aging society. With the largest wave of baby boomers on the brink of retirement, there are concerns that many small-business owners have neglected to adequately plan their exit strategies.
This improper management can have significant ramifications for not only the business owners but for their employees, customers, families and the economy as a whole.
One basic and preventable error that I often see with new clients in my practice is the inaccurate management of minute books. Keeping proper corporate records of a company’s activities is essential to not only the success of the business, but also to ensuring the transition process is smooth when the time comes to sell.
Not only should the minute book contain documents relating to the incorporation of your company, but it should also serve as a means by which you can prove ownership of the company. An improperly established or maintained minute book can have serious implications on the ability of a business owner to successfully transition the business to a new owner.
Throughout the succession planning process, professional advisers will review legal transactions and documents to devise a sound succession plan.
Reviewing the minute books is a key component of the process for advisers to put the necessary structure and contracts in place for the sale.
However, many business owners neglect or don’t understand the significance of corporate record books. That can threaten the entire transaction when selling your business.
In one instance, a new client seeking to sell their business was adamant that the business was in good order and it would be an easy transition. When the purchaser’s lawyer reviewed the minute book to confirm that my client actually owned the business, however, a problem arose.
Twenty years earlier, upon acquiring the business, the person transferring the shares had made an error. While the prior owner had 1,000 shares, the minute book showed my client only had 100 shares.
Naturally, the lawyer for the new purchaser needed to confirm the chain of title before going any further and pointed out that my client didn’t own all of the shares. He wanted to know who owned the other 900 shares. Because there was no proof that the business was owned outright by my client, the entire transaction was threatened.
The only solution was to try to correct the record. But contacting the people involved proved to be a challenge because of the time that had elapsed since the error had been committed. Some had passed away, one was near death and the person who helped him buy the business was avoiding any contact.
The purchaser quite rightly wouldn’t accept my client’s word that it was just a typographical error. The only solution was to petition the court to rectify the minute book. This was costly and time consuming but it was the only solution available. We obtained rectification and eventually the transaction proceeded successfully.
The message is clear. Keeping proper corporate records is fundamental when dealing with business succession.
Failure to establish or maintain proper corporate records could result in significant delays in proceeding with the sale, cost thousands of dollars to rectify or force the entire transaction to be shut down.
Every year at the same time review all major business activities and ensure that each event is recorded, dated and signed in the minute book. (Choosing the birth date of a mate or child or the date of an anniversary will make it easier to remember.)
These small steps will help guarantee the business is being operated professionally and will help eliminate potential problems when transitioning the business to a new owner.
If you take steps now to review issues in advance of a transaction, you will identify any issues up front and get them resolved before you start the business succession process.
Operating your business professionally will make the transition process smoother and ultimately will serve to benefit you in the future.
Don Sihota is a partner with Clark Wilson LLP who specializes in private business transactions. [email protected]