The Agreement of Purchase and Sale – Fundamentals that Every Buyer and Seller Should Know
Purchasing and selling a business is a complex transaction requiring legal counsel to draft the underlying agreement, satisfy the conditions to the agreement, and draft the closing documents.
The purchase or sale of a business can quite simply be broken down into 2 Steps.
- An Agreement of Purchase and Sale (Asset Purchase Agreement or Share Purchase Agreement) is signed with a closing date set at some time in the future.
- Closing documents are prepared and signed on the closing date to formally transfer the business from Party A to Party B.
Step One – The Agreement of Purchase and Sale
An Agreement of Purchase and Sale (APS) normally comes in two forms: an Asset Purchase Agreement (APA) or a Share Purchase Agreement (SPA). Sometimes it is also referred to as an APS which is the general name for a purchase and sale contract. An APS, APA or SPA is a binding contract between a purchaser and a seller that sets out all the details of the transaction including sale price, purchase terms, conditions, and closing date.
Regardless of the type of business sale contemplated, the first step is to negotiate and draft the agreement. Sometimes real estate agents, brokers or even the parties themselves prepare and sign the agreement. In most cases, however, lawyers are retained before an agreement is signed. At this stage, the parties will have entered into preliminary discussions or have drafted a Letter of Intent (LOI), a non-binding document that outlines all the key terms, which is helpful in moving the deal forward to success. The lawyer then undertakes the back-and-forth negotiation with the other side, drafts and re-drafts the APS.
All agreements will have a closing date. A closing date is the date in which both the parties agree that the transaction will officially occur. Usually, the closing date occurs 30 to 60 days after an agreement is signed. In this sense, a commercial transaction for the purchase or sale of a business is quite similar to a real estate purchase or sale where an agreement is entered to buy or sell a home at some time in the near future, given the parties the ability to prepare for the sale. Parties often believe that by entering into an APS they have sold their business – however this is not the case. An APS is merely an agreement between two parties to buy or sell the business at some date in the future. The key documents to transfer the business are called closing documents and are executed on the closing date, usually being about 30 days after the execution of the initial purchase agreement.
Step Two –Closing Documents and Conditions
In Step Two, a lawyer must work towards closing by first (a) satisfying all of the conditions to the agreement and second (b) preparing the closing documents.
In most business deals, the closing is conditional upon the occurrence of 3 items: (a) due diligence conducted by the purchaser in respect of the business (b) the purchaser having arranged financing to purchase the business and (c) the landlord consenting to the transfer of the business or assignment of the applicable lease in which the business operates. However, there may be further conditions or fewer conditions depending on the nature of the particular deal. Where the seller is a franchise, an ordinary condition is for the franchisor to provide its consent to the business sale. Where the deal is a cash offer, no financing condition is needed.
There are generally two types of due diligence conducted by a purchaser against the business: legal due diligence and financial due diligence. Legal due diligence is a review of the material contracts of a business, such as its lease, employment agreements and supplier agreements. Legal due diligence is normally conducted by the purchaser’s lawyer by engaging in something called document review. Here, the lawyer is looking for the salient or onerous terms to any contract which should be pointed out to the purchaser who will soon be bound by these contracts. Financial due diligence on the other hand, is normally conducted by an accountant. Financial due diligence looks to the financial health of the business by reviewing its financial statements, profit and loss statements as well as its working capital and balance sheet for the preceding 3 years prior to the closing date.
The satisfaction of conditions are conducted during the condition period set out in the agreement. Normally, a conditional period is about 2 weeks from the date of signing of the APS. The agreement or ‘deal’ is not firm until the conditions are satisfied. Once the conditions are satisfied, the deal is firm and can move forward to closing. Where the purchaser fails to satisfy the conditions (is unable to secure financing) or is not pleased with its due diligence review, it may walk away from the purchase. In most cases, any prior deposit paid is refundable to the purchaser.
B. Closing Documents
Once the conditions are satisfied the deal is firm. This means the parties are working towards closing by preparing the closing documents required in order to legally effect the transfer of the business.
For example, a Bill of Sale is a closing document that is required in order to legally transfer the assets of a business from the seller to the purchaser on the date of closing. An agreement alone does not transfer the assets – it merely states that the assets are to be transferred by way of a Bill of Sale on closing
The complexity of preparing and finalizing closing documents is clearly apparent when you consider the following requirements when closing a share sale:
- Certificate of incumbency
- Authorizing resolution of shareholders of corporation to enter into the purchase agreement
- Consent to transfer of shares
- Resolution of the board of directors authorizing the transfer of shares
- Transmission of shares
- Endorsing and cancelling of share certificates
- New share certificates in favour of purchaser
- Completion of ledgers and registers in the minute book of the Corporation showing the shares to be fully entered in the name of the Purchaser
- Resignation of vendor as director and officer
- Resolutions re election of purchaser as director and officer
- Indemnity in favour of buyer relating to pre-sale matters
- Indemnity in favour of seller relating to post-sale matters
- Solicitor’s opinion
- Indemnity re employees
- Acknowledgement and release by employees
- Section116 statutory declaration by vendors as to age and Canadian residency
- Certificate of representations and warranties or bring-down certificate
- Mechanical fitness certificates of vehicles or equipment
- Non-competition and non-solicitation agreement
- Post-closing consultation agreement
- Direction re funds
- Statement of adjustments
- Undertaking to readjust
- Receipt for payment of the purchase price
- PPSA registration
- General security agreement
- Share pledge agreement
- Discharges of all Personal Property Security Act registrations against the Corporation (or solicitors undertaking in respect of the forthcoming discharges)
- Certificate of status of corporation
- Form 1 Notice of Change
In an Asset Sale, a common list of closing documents required to be prepared are:
- Certificate of Incumbency of buyer and seller
- Special resolution of shareholders of selling corporation authorizing sale
- Directors resolution of selling corporation authorizing sale
- Resolution re adoption of purchase agreement by purchaser corporation
- Authorizing resolution of purchaser corporation
- Certificate of representations and warranties or bring-down certificate
- Purchaser’s Certificate with respect to representations and warranties
- Certificate of Status
- Sellers statutory declaration re residency
- Undertaking to readjust
- Joint Election under s.167(1) of the Excise Tax Act
- WSIB Purchase Certificate
- Vendor’s Clearance Certificate pursuant to s.6(3) of the Retail Sales Tax Act
- Section 116 of the Income Tax Act statutory declaration by the Vendors as to their age and Canadian residency
- Promissory note
- General security agreement
- General assignment of contracts
- Assignment of lease agreement
- Notice of termination of employees
- Offer to hire employees
- Assignment of trade-name
- Assignment of telephone number
- Assignment of website, social media accounts and other intellectual property
- Non-competition and non-solicitation agreement
- Bill of Sale
- Statement of adjustments
When buying or selling a business, a number of documents are required to be reviewed, negotiated and drafted. Consult with a lawyer as soon as possible prior to entering into the purchase agreement to ensure that your interests are protected. Often, once an agreement is signed by the parties, the fundamental terms cannot be changed where items are later flagged by a reviewing lawyer. At Kalfa Law, our commercial law department routinely assists in the purchase and sale of businesses across a variety of industries. We handle approximately 2 to 5 business purchases or sales per month and are well versed in the nuances of business deal drafting and negotiation. Call us to discuss your potential purchase and sale at
Other closing documents include the Non-Competition Agreement, the Termination or Hiring of the Employees of the busness, the Indemnity, the corporation resolutions, and the statutory declarations and filings with the CRA.
- Non-Competition Agreements
In an asset sale of purely goodwill, which occurs where a business sells its client lists and trade name, it is crucial for the deal to include a non-competition agreement. This is because the entire purchase price is predicated on the goodwill of the seller. There are no hard or physical assets such as product, equipment or inventory, which make up the value of the business. Goodwill of a business is typically intimately tied to the seller, who has generated that goodwill in the marketplace. If he or she were to continue to operate a similar business, the value of the goodwill being purchased is reduced to zero, effectively destroying your purchase.
For example, an insurance broker wishes to sell his or her list of clients–the broker’s goodwill–for $50,000. The purchaser does so in the hopes that the clients on the list will continue to use the purchaser as their insurance broker. Typically in these circumstances, the seller will introduce the purchaser to the clients and indicate that this is his or her successor to incentivize the customers to continue to purchase insurance with the purchaser.
If the seller doesn’t sign a non-competition agreement in connection with the goodwill sale, he can simply open up shop across the street and continue to sell insurance. Of course, all of company’s existing clients will go across the street and purchase insurance from the seller, with whom they already have a relationship. The purchaser will have purchased goodwill for $50,000 that has been reduced to zero.
For this reason, non-competition agreements are crucial in goodwill sales and are extremely important in hard asset sales as well.
2. The Termination and Hiring of Employees
Employees usually represent another contentious item when negotiating an asset purchase. Under law, when the assets of a business are sold to a new purchaser, all of the employees become successor employers to the purchaser. This means that all of the employees’ liability, such as their work history, vacation pay, termination pay, and severance pay entitlements are transferred to the purchaser. If the purchaser wishes to terminate an employee after 6 months of buying the business, the purchaser will have to pay the employee termination pay, representing the entire time the employee was employed by the previous business. Without provisions in place to protect the buyer, he or she could potentially have to pay a large bill in termination pay to an employee.
As a result, a purchaser will typically demand that the seller terminate all of the employees’ employment with the business, effective the closing date. The purchaser will require that the seller pay the employees all their statutory rights in respect of this termination, such as termination pay, severance pay and accrued vacation pay.
The purchaser will then offer employment to the employees on substantially the same terms as the previous employment. The employees will start work for the purchaser effective the closing date, and the purchaser will only be labile to his employees for vacation, termination, and severance pay from that day forward.
Because the seller will be saddled with a large payout to his/her employees, the seller may wish to increase the purchase price to reflect these liabilities. As both the seller’s and the purchaser’s interest are fundamentally at odds, the issue of employees typically become a contentious issue when negotiating an asset purchase or sale.
3. Seller’s Indemnity
One of the most difficult discussions in negotiating a purchase and sales agreement will concern the seller’s indemnity and any limitations of the liability assumed by the seller. An indemnity protects the purchaser against damages suffered due to breaches of the seller’s representations, warranties, and covenants. At the same time, the seller will want to limit his indemnity liability to the purchaser. The final provisions of the agreement represent a negotiated balance concerning the degree that the parties assume the associated risk and cost when breaches occur.
A seller’s indemnity clause is a contractual provision in which the seller agrees to protect the purchaser from “all liabilities, claims, and demands” that may arise due to breaches of representations or non-performance of covenants made by the seller.
The seller will likely want to limit his liability, however. This will involve the inclusion of a survival period, language qualifiers, and monetary limitations.
a. Survival Period
A survival period limits the time period a buyer can commence litigation for breach of representation, warranty, or covenants. Common ranges of survival periods are 12 to 36 months for general representations and warranties, six months following the expiration of the limitation period for tax matters, and six months following the expiration of the applicable limitation period of fundamental representations and warranties, such as authority to enter into agreement and title to assets.
b. Language Qualifiers
Other methods used to limit the seller’s liability include language qualifiers, such as “to the best of my knowledge” and “in all material respects,” as in “to the knowledge of the seller, the premises contains no asbestos” and “the seller complies, in all material respect, with applicable laws.”
The purchaser, therefore, should avoid these qualifiers that limit the seller’s liability, as not doing so would result in shifting the indemnification risk from the seller to the purchaser.
c. Monetary Limitations
The Purchase and Sales Agreement can also limit the seller’s liability by stipulating the amount that a seller has to pay where there is a breach of the representations, warranties, and covenants made. The limit might be an amount equal to the purchase price or a percentage of the purchase price. Or there might be limits on indemnification specific to certain types of loss, i.e., breaches of general representations and warranties will incur a payout to a maximum of 30% of the purchase price, while breaches of environmental representations and warranties incur a payout up to 50% of the purchase price. For fundamental breaches such as title to the shares or assets, the limit is often not less than the purchase price.
Where the purchase price is a substantial amount, claims for indemnification may be subject to a “basket” (also sometimes referred to as a “deductible”). If so, the seller will not be responsible to the purchaser for any indemnification payment unless damages reach a certain amount. Once the basket is reached, the seller is responsible for all liabilities in excess of the basket amount.
3. Corporate Resolutions
One of the duties of the directors of a corporation is to approve agreements, contracts, leases and other documents that the corporation is or has entered into with other parties.
a. Elements of a Directors’ Resolution to Approve an Agreement
The statues of incorporation will outline clear instructions for how directors will pass resolutions to approve agreement. A directors’ resolution will lay out the following:
- Recitals (these describe what the agreement or matter is about and what the directors hope to achieve by the approval)
- Approval of the Terms and Conditions of the Agreement
- Approval of the form of Agreement
- Approval of the authorized signing authorities who can sign the agreement on behalf of the corporation
- Approval of the delivery of the agreement by the authorized signing authorities
- A catchall phrase
b. Examples of the Elements of a Directors’ Resolution to Approve an Agreement
The following is an example of language commonly used in the recital portion of Purchase and Sales Agreement:
“WHEREAS the Corporation wishes to enter into an agreement of purchase and sale (the “Agreement”) among the Corporation, 5213672 Ontario Inc. (“5213672”), and John Doe dated the 10th day of July, 2019, pursuant to which the Corporation shall purchase from 5213672 all of the assets of a business known as Coffee Kraze.”
Approval of Terms and Conditions
The following is an example of the language commonly used in a Directors’ Resolution to approve an agreement’s terms and conditions:
“NOW THEREFORE BE IT RESOLVED THAT:
The entering into of the Agreement by the Corporation, pursuant to the terms and conditions thereof, is hereby approved.
Signing Authority for a Directors Resolution
The by-laws of a corporation determine who can sign agreements on behalf of a corporation and whether those persons—usually directors and/or officers—can appoint someone else to approve an agreement.
The following is an example of the language commonly used in the Signing Authority portion of a Directors’ Resolution:
“Execution of Instruments – Deeds, transfers, assignments, contracts, obligations, certificates and other instruments may be signed on behalf of the Corporation by any officer or director of the Corporation. In addition, the board may from time to time direct the manner in which and the person or persons by whom any particular instrument or class of instruments may or shall be signed. Any signing officer may affix the corporate seal to any instrument requiring the same.”
The final clause in a directors’ resolution to approve an agreement is the catchall phrase. This gives the authorized signing authority the right to execute all other ancillary documents that may be required to implement the transaction contemplated by the Agreement.
Below is an example of a catchall phrase:
“Any officer or director of the Corporation be and is hereby authorized and directed to do all acts and things and to execute or cause to be executed all such instruments, agreements and documents as in his opinion may be necessary or desirable to complete the transactions contemplated herein.”
Statutory Declarations and Filings With the CRA
Making statutory declarations and filings with the CRA so that your income tax return reflects your and your business’s new status. The following are some of steps that you should take when you have bought a new business.
- Apply for new business number (BN ) and new CRA program account. If you want to change the legal ownership or the structure of your business (eg. From sole proprietorship to partnership), you will have to register for a new business number and new CRA program account.
- Authorize a representative for your new business, who will have access to all or some of your CRA program account.
- Notify the CRA of any changes to your business address.
- Change of legal status, from one type of business structure to another type. For example, did the purchase of a new business change your status from a sole proprietor to a corporation?
- Change of fiscal year-end, which depends on whether your business structure is a sole proprietorship, partnership, or corporation
- Change of owner, director, or partner named on the business
- Change of legal business name, the name of the owner or corporation, and operating name, the business name that is used in the public sphere
- Change of business activity, eg. A “home renovator” buys a construction business must notify the CRA that his business activity is now a “homebuilder.”
- Make Payroll account changes
- Register a new GST/HST account and include the names and SIN number of at least one of the new owners, directors, or partners on a new GST/HST account; and register the new business activity, if applicable, on the new GST/HST account.
- Valuate inventory – If the individual asset prices are not set out in the contract, you have to determine how much of the purchase price you should attribute to each asset, how much to inventory and how much, if any, to goodwill. The amount you allocate to each asset should be its fair market value (FMV). You should allocate to goodwill the balance of the purchase price that remains, after you allocate the FMV to each asset and to inventory.
Drafting an agreement, Letter of Intent, and closing documents are complex enterprises. Hiring a qualified lawyer who is experienced in the execution of corporate and commercial transactions is crucial to protect your rights. The lawyers at Kalfa Law handle a variety of business transactions on a routine basis. With our combined tax and corporate law experience, our lawyers anticipate complex corporate and tax issues and formulate optimal solutions that forward your interests in obtaining the highest valuation for your business and paying the least amount of tax possible.
-Shira Kalfa, BA, JD, Partner and Founder
© Kalfa Law 2019