The Two-Step Process to Buying a Business or Selling a Business
Buying or selling a business is one of the most legally and financially significant transactions a Canadian business owner will ever undertake. Unlike a real estate deal where the structure of the transaction is largely standardized, a business acquisition involves a fundamental initial decision that shapes every document, every tax consequence, and every negotiation that follows. Are you buying and selling the assets of the business or the shares of the corporation that owns it? From that decision forward, the transaction proceeds in two broad stages.
Negotiating and executing the agreement of purchase and sale and then satisfying conditions and preparing the closing documents that complete the deal. Each stage involves specific legal instruments, statutory obligations, and professional responsibilities that a qualified business acquisition lawyer must manage on behalf of both buyer and seller.
The Preliminary Step
Before any agreement is signed, the parties must determine whether the transaction will be structured as an asset purchase or a share purchase. This decision is rarely neutral. It has material consequences for the buyer’s liability exposure, the seller’s tax position, the treatment of employees, the assignability of contracts, and the ability to use or lose various tax attributes of the acquired business. A full treatment of this subject appears in the guide to asset sales vs. share sales, but the key points bear repeating here because they set the stage for every document that follows.
In an asset purchase, the buyer acquires specific assets of the business equipment, inventory, goodwill, intellectual property, customer lists, and any other items the parties agree to include while leaving behind the legal entity (the corporation) and its history of liabilities. The buyer gets a clean start, a stepped-up tax cost base for the acquired assets, and the ability to cherry-pick what they want and exclude what they do not. The seller receives proceeds at the corporate level, which creates a two-level tax problem. The corporation pays tax on any gain or recaptured capital cost allowance on the sale of the assets, and the shareholder then pays personal tax again on extracting those proceeds from the corporation as a dividend. The asset purchase is therefore typically preferred by buyers and disfavoured by sellers.
In a share purchase, the buyer acquires the issued and outstanding shares of the corporation, stepping into the shoes of the previous shareholders and inheriting everything the corporation owns and owes. The buyer takes on all historical liabilities of the target, including unknown or contingent liabilities, which is why share purchase agreements include extensive representation and warranty provisions and often require warranty and indemnity insurance in larger transactions. For the seller, a share sale offers the possibility of claiming the Lifetime Capital Gains Exemption under section 110.6 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (“ITA”), currently approximately $1,250,000 in sheltered capital gains on qualifying small business corporation shares, a significant incentive that explains why sellers usually prefer share deals.
The gap between buyer and seller preferences on structure is often bridged through price negotiation (a seller may accept a lower price for an asset deal if the after-tax proceeds are comparable), a hybrid transaction (where some assets and the shares are sold separately), or a section 85 rollover under the ITA (where assets are transferred to a new corporation and shares of that corporation are sold, allowing the seller to access the LCGE). Kalfa Law Firm regularly assists clients in evaluating these trade-offs and structuring the transaction to achieve the best outcome for both sides.
The Agreement of Purchase and Sale
Once the structure is decided, the parties proceed to document the deal. In most transactions, this begins with a non-binding Letter of Intent (“LOI”) or term sheet, which records the key commercial terms agreed upon in principle. The LOI is typically not legally binding on its economic terms, but it may contain binding provisions on confidentiality, exclusivity, and the allocation of break-up fees if one party walks away. A well-drafted LOI reduces the risk of misalignment when the formal agreement is being negotiated, and it can be drafted relatively quickly, often in a day or two, to give both parties comfort that a deal is being progressed before expensive legal drafting begins.
The Agreement of Purchase and Sale (“APS”) is the binding contract. Whether it is called an Asset Purchase Agreement or a Share Purchase Agreement depends on the structure, but in both cases it is a comprehensive document that will typically include the following core elements.
Purchase price and payment terms
The APS specifies the total consideration and how it is to be paid. In most small to mid-sized business transactions, the purchase price is paid in cash at closing, but deals frequently include a combination of cash, vendor take-back financing (where the seller lends the buyer part of the purchase price), and earnout provisions (where the buyer pays additional consideration after closing if the business meets defined performance targets). Working capital adjustments are also common in share purchase transactions. The parties agree on a target working capital level at closing, and the price is adjusted upward or downward after closing based on the actual working capital delivered. Earnouts are often contentious post-closing because the buyer controls the business post-acquisition and can influence whether the targets are met, which is why the earnout provisions and the buyer’s operational obligations during the earnout period must be drafted carefully.
Representations and warranties
This section is the heart of any business purchase agreement. The seller makes detailed factual statements about the business as of the date of signing and the date of closing. That the financial statements are accurate, that there is no undisclosed litigation, that all taxes have been paid, that the assets are free of encumbrances, that material contracts are valid and in force, that the business is compliant with applicable laws, and dozens of other matters. In a share purchase, the representations are made about the corporation and its subsidiaries. In an asset purchase, about the assets being transferred and the business being conducted. If a representation turns out to be false after closing, the buyer has a claim against the seller under the indemnity provisions of the agreement.
Conditions precedent
The APS will identify conditions that must be satisfied before either party is obligated to close the transaction. Conditions protect the parties against changed circumstances and give the buyer the right to conduct due diligence, a detailed review of the business, its contracts, financial records, regulatory standing, and other matters before committing irrevocably. Common conditions are discussed in detail in Step Two below. If a condition is not satisfied by the agreed deadline, the party whose benefit it is for may waive it (if they are willing to proceed anyway) or terminate the agreement.
Restrictive covenants
Most business acquisitions include a non-competition agreement obligating the seller and often key employees not to compete with the business in a defined geographic area for a defined period after closing. In Canada, non-competition covenants in the context of the sale of a business are enforced more readily than they are in employment agreements, because the courts recognize that the buyer is paying for the goodwill of the business and the seller is receiving consideration for the covenant as part of the purchase price. That said, the scope, duration, and geographic extent of the covenant must be reasonable. Non-solicitation covenants (prohibiting the seller from poaching customers or employees) are typically included alongside or in lieu of broader non-competes.
The closing date
The APS will specify a closing date, typically 30 to 90 days after signing, when the transaction will become legally effective, the purchase price will be paid, and the parties will exchange the closing documents. The exact timeline depends on the complexity of the due diligence process, the time needed to satisfy conditions (including regulatory approvals or third-party consents), and the availability of financing.
Satisfying Conditions and Preparing Closing Documents
Part A
Satisfying the Conditions
The conditional period between signing the APS and closing is one of the most active phases of the transaction. During this period, which typically runs for 10 to 30 days in simpler transactions, though it can be longer, the parties work to satisfy the conditions in the APS so that the deal can proceed to closing.
Due diligence is the buyer’s primary activity during the conditional period. The buyer’s lawyers and accountants review financial statements, tax returns, material contracts, employment agreements, leases, regulatory approvals, intellectual property registrations, environmental records, and litigation history. The goal is to verify that the business is what the seller represented it to be and to identify issues that require a price adjustment, a change to the representations and warranties, a holdback, or in extreme cases termination of the deal. The scope and depth of due diligence vary significantly with the size and complexity of the transaction.
Lease assignment is one of the most common and time-sensitive conditions. If the business operates from a leased premises, the buyer will need the landlord’s consent to assign the lease or to grant a new lease to the buyer’s entity. Most commercial leases require landlord consent for any assignment, and landlords may condition their consent on the buyer meeting certain financial criteria or agreeing to a personal guarantee. Obtaining landlord consent can take several weeks and is often on the critical path to closing.
Financing approval is typically a buyer’s condition. The buyer must obtain the committed debt financing required to complete the acquisition. This condition requires the buyer to have submitted a financing application and received a commitment letter from the lender. Sellers often push back on financing conditions or insist on a short deadline for satisfaction to minimize the risk that the buyer uses financing uncertainty as an excuse to exit the deal.
Third-party consents may be required under material contracts that contain change of control provisions (in a share sale) or assignment restrictions (in an asset sale). Identifying these contracts during due diligence and obtaining the required consents before closing is essential. Proceeding to close without a required consent may allow the counterparty to terminate the contract post-closing, which can destroy a significant portion of the value the buyer acquired.
Regulatory approvals may be required depending on the nature of the business. Licensed businesses in healthcare, finance, transportation, cannabis, and other regulated sectors may require regulator approval or a new license application before the transaction can close. In larger transactions, the Competition Bureau may need to review the acquisition under the Competition Act, R.S.C. 1985, c. C-34.
Clearance certificates from the Canada Revenue Agency are standard in asset acquisitions and recommended in share acquisitions. Under section 159 of the ITA, a legal representative (including a vendor of business assets) can be held personally liable for unremitted taxes of the business unless they obtain a clearance certificate from the CRA confirming that all tax liabilities have been discharged. CRA clearance certificates can take several weeks to months to obtain, which is one reason asset sale timelines tend to be longer than share sale timelines for comparable businesses.
Part B
Preparing the Closing Documents
Once all conditions have been satisfied or waived, the parties’ lawyers prepare the closing documents. The specific documents differ depending on whether the transaction is structured as a share sale or an asset sale.
Share sale closing documents
Typically include corporate resolutions of the target corporation authorizing the transaction. share certificates evidencing the transfer of shares from seller to buyer (or, where shares are held in uncertificated form, a share transfer register entry), resignation letters from all outgoing directors and officers of the target corporation, election and consent forms for the incoming directors and officers, a share purchase agreement or assignment, a general security agreement or postponement of security (if the seller is taking back financing), a non-competition agreement signed by the seller and any key managers, a solicitor’s opinion letter from the seller’s counsel confirming the corporate authority and good standing of the target, any required consents or approvals, and Personal Property Security Act (“PPSA”) registrations or discharges as required.
Asset sale closing documents
Typically include a bill of sale transferring each asset to the buyer, assignment and assumption agreements for any contracts, leases, or licenses being transferred, and a general security agreement in favor of the seller (if the seller is providing vendor financing). A GST/HST going-concern election under section 167 of the Excise Tax Act, R.S.C. 1985, c. E-15 (Form GST44), if the parties are jointly electing to treat the transaction as a going-concern acquisition to avoid the buyer having to pay and later recover HST on the purchase price. WSIB clearance certificates confirming the seller has no outstanding workers’ compensation obligations. CRA clearance certificates under section 159 of the ITA. A statutory declaration of the seller confirming no undisclosed claims. PPSA search results and discharges confirming the acquired assets are free of encumbrances and a non-competition agreement.
Closing mechanics
In many private business acquisitions, closing occurs in escrow. The lawyers exchange signed documents and funds in escrow, confirm that all conditions are satisfied, and then simultaneously release the documents and wire the purchase price at a pre-agreed closing time. In smaller transactions, closing may occur in a single meeting where the lawyers attend in person with the principals. The buyer’s lawyer registers any required PPSA security immediately after closing to protect the buyer’s security interest in the assets or shares that secure the vendor’s take-back financing.
What Happens at Closing
At closing, the legal ownership of the business transfers from seller to buyer. In a share sale, the share certificates are endorsed and delivered to the buyer, the share register is updated, and the buyer’s nominees take office as directors and officers. In an asset sale, the bill of sale is delivered, the keys (literal and figurative) are handed over, and any employees of the business who are continuing with the new ownership are notified of the change.
Employee continuity is handled differently in share sales and asset sales. In a share sale, the employees are employees of the target corporation before and after closing the employment relationships continue without interruption, and all accrued entitlements (vacation, notice periods, statutory severance) carry over to the buyer. In an asset sale, the employees are technically terminated by the seller and rehired by the buyer, though the Employment Standards Act, 2000, S.O. 2000, c. 41 (“ESA”) deems continuity of employment when a business or part of a business is sold, meaning the buyer inherits employees’ length-of-service entitlements for ESA purposes regardless of the technical re-hire. Failing to account for this in an asset purchase can be an unexpected liability for the buyer.
Tax Considerations at Closing
The tax consequences of a business acquisition do not end with the closing. They continue for years, through post-closing tax returns, audit risk on the representations about historical tax compliance, and the ongoing interaction between the acquired business’s tax attributes and the buyer’s own structure.
For the seller in a share sale, the key question is whether the capital gain on the sale of shares qualifies for the LCGE under section 110.6 of the ITA. The shares must be qualified small business corporation shares (“QSBC shares”) as defined in section 110.6(1). The corporation must be a Canadian-Controlled Private Corporation, at least 90% of its assets must be used in an active business carried on in Canada at the time of the sale, and at least 50% of its assets must have satisfied that test throughout the 24-month period immediately before the sale. Failure to meet these conditions because of excess passive assets or because holding company shares were inadvertently included in the sale without prior restructuring can cost the seller hundreds of thousands of dollars in preventable capital gains tax.
For the buyer in an asset sale, the purchase price must be allocated among the acquired assets in accordance with sections 68 and 13 of the ITA. The allocation affects the buyer’s future capital cost allowance claims and the potential for recaptured CCA if those assets are later disposed of. The seller and buyer are required to use the same allocation, which must be reasonable, and the CRA can challenge an allocation it considers unreasonable. This allocation is one of the more technically demanding aspects of an asset purchase agreement and should be reviewed by both parties’ tax advisors.
The section 167 going-concern election under the Excise Tax Act eliminates the requirement for the buyer to pay HST (13% in Ontario) on the gross purchase price of the business and then wait to recover it through a net tax remittance, provided both parties are HST registrants and the acquired assets together constitute a business or part of a business capable of being operated independently. The election is filed on Form GST44 and must be filed by the buyer with its HST return for the period in which the acquisition occurred.
Ready to Buy or Sell a Business in Ontario?
Whether you are acquiring a business for the first time or selling the company you built, the legal process is more complex than most buyers and sellers anticipate, and the consequences of getting it wrong can follow you for years. Kalfa Law Firm advises buyers and sellers across Ontario on business acquisitions and dispositions of all sizes, from the initial structuring decision through due diligence, agreement drafting, condition satisfaction, and closing. Contact us today for a consultation to discuss your transaction.
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Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law Firm. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.
© Kalfa Law 2025. Updated October 19, 2026
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.
