Legal and Tax audit: the first step before selling

Selling a business is rarely a simple transfer of ownership. It's a complex operation where every detail matters. Yet, many Quebec business leaders underestimate the importance of a preliminary audit of their legal and tax situation. The risk? Discovering, in the middle of negotiations, irregularities in contracts, unpaid tax obligations, or inadequate corporate structures. These surprises can delay, reduce, or even cause the transaction to fail.

A complete audit before launching into the sale process is therefore much more than a formality: it's the first essential step to secure and maximize the transaction.

A preliminary audit is not limited to a technical review of documents. It protects what every entrepreneur wants to preserve:

• The value of the business: avoid a price drop due to risks discovered by the buyer.
• Taxation: reduce the tax burden through proactive planning.
• Legal security: prevent post-sale litigation that could pursue you for years after the transaction.

In reality, the audit is a tool for control and credibility. It gives confidence to potential buyers and puts you in a position of strength during negotiations.

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Typical profiles

Profile 1: The Entrepreneur confident in their finances "Our financial statements are solid, I have nothing to worry about."

Common mistake: believing that financial strength is enough to reassure a buyer, without analyzing the quality of commercial contracts, lease compliance, or the validity of employment agreements.

Recommended strategy:

• Conduct an exhaustive contractual audit covering all agreements (clients, suppliers, partners, employees).
• Verify termination clauses, implicit obligations, and litigation risks related to ambiguous or outdated terms.
• Correct or renegotiate problematic contracts before approaching buyers.

Advantages:

• Strengthens the company's credibility.
• Reduces the buyer's negotiating power, who cannot invoke hidden risks to lower the price.
• Avoids the imposition of personal guarantees or price holdbacks.
• Promotes a smooth transaction with fewer conditional clauses.

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Profile 2: The family business "We've always operated simply, without written agreements."

Common mistake: relying on verbal agreements, informal arrangements, or unstructured tax benefits, which can create conflicts or limit access to certain exemptions.

Recommended strategy:

• Draft clear shareholder agreements covering voting rights, share transfers, and exit terms.
• Regularize loans or advances between family members.
• Establish a corporate structure that meets capital gains exemption conditions.
• Optimize share ownership through a family trust, allowing advantageous tax distribution among heirs.

Advantages:

• Secures family succession or external sale.
• Avoids internal conflicts at the time of transaction.
• Allows maximization of tax relief (up to $971,000 per shareholder in capital gains exemption).
• Strengthens transparency and confidence of external investors or buyers.

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Profile 3: The indispensable founder "Without me, the business doesn't run... but I'm ready to sell."

Common mistake: not delegating, not documenting processes, and remaining the only person holding key expertise.

Recommended strategy:

• Establish an autonomous and well-structured management team.
• Document critical procedures: sales, production, finance, client relations.
• Review employment contracts and incentive schemes to retain key managers.
• Highlight the brand, systems, and processes rather than the founder's figure.

Advantages:

• Reduces the perception of personal dependency risk.
• Increases the company's appeal to financial or strategic buyers.
• Enables a faster transition after the sale.
• Protects the company's value, even if the founder leaves quickly.

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Tax or Legal Levers used

1. Complete tax audit

• Simple definition: a detailed review of past and current tax obligations.

• How it works in practice: verify compliance of returns, validity of tax credits used, and anticipate tax impacts of a sale.

• Advantages: correct anomalies before a buyer discovers them, reduce risks of reassessment by tax authorities.

• Example: an entrepreneur discovered that a scientific research credit had been incorrectly applied. The audit allowed the situation to be regularized and avoided a claim of several hundred thousand dollars.

2. Contractual audit

• Simple definition: a systematic verification of all key contracts (clients, suppliers, employees, leases).

• How it works in practice: identify termination clauses, excessive dependencies on a single client, or non-transferable contracts.

• Advantages: anticipate negotiations with partners and strengthen the company's solidity in the eyes of buyers.

• Example: a company depended on a single client representing 40% of its revenue, but the contract was not assignable. The audit allowed renegotiation before the sale.

3. Corporate compliance verification

• Simple definition: ensuring that the company's legal structure complies with laws and regulations.

• How it works in practice: verify articles of incorporation, corporate registers, shareholder agreements, and important resolutions.

• Advantages: avoid challenges to the legitimacy of certain decisions or to the actual ownership of shares.

• Example: an incomplete corporate register has already caused a transaction to fail, with the buyer fearing litigation over share ownership.

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Practical case

A Quebec entrepreneur in the professional services sector wanted to sell after 20 years of activity. His assets included: an operating company, cash reserves, and a building used by the business.

Steps taken:

• Complete tax audit: correction of minor anomalies in returns.
• Contractual audit: update of several client agreements and clarification of non-compete obligations.
• Corporate reorganization: extraction of the building into a holding company.

Results: The transaction closed in 9 months, at a price 18% higher than the initial valuation, with tax savings exceeding $450,000. The buyer highlighted transparency and rigor as key elements that facilitated their decision.

What we often forget

• Dormant liabilities: a forgotten lawsuit or unsettled debt can resurface in the middle of a transaction.
• HR documentation: incomplete employment contracts, poorly defined benefits, risks of wage claims.
• Psychological preparation of the seller: an entrepreneur who hesitates or isn't ready to detach themselves slows down discussions and may scare off the buyer.

Essential questions to ask yourself

• Are my tax returns up to date and compliant?
• Are my key contracts transferable and legally sound?
• Does my corporate register accurately reflect reality?
• What risks could a buyer discover when auditing my business?
• Am I ready to be completely transparent about my financial and legal situation?

Ignoring the preliminary audit means taking the risk of:

• seeing a buyer withdraw at the last minute;
• accepting a significant drop in the sale price;
• paying unexpected taxes or penalties;
• prolonging the transaction by several months, with increased stress for all parties.
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A legal and tax audit is the first step of any successful business sale. Far from being a bureaucratic exercise, it constitutes both a shield and a lever: it secures the transaction, strengthens buyer confidence, and protects your interests. Plan early, audit thoroughly, act with transparency: this is the key to transforming your business's potential value into real value.