Buying or Selling a Business in Ontario: Legal Considerations


By
Robert Krizman
July 21, 2014

Buying or selling a business is, and can certainly seem, complex. There are many legal issues that need to be considered and addressed. This article is a very short summary of some of the general legal steps involved in buying or selling a business in Ontario.

Once a potential buyer for the business has been identified, a seller and buyer should strongly consider negotiating and signing a confidentiality/non-disclosure agreement (“NDA”) to protect any confidential information that may be shared between them. This will be very important for a seller as they will want to ensure that the potential buyer does not disclose the confidential information of the business to anyone or use that information for any competitive or other purpose, except to decide whether to buy the business.

After a NDA has been signed, the next step in many deals is for the buyer and seller to either negotiate and sign a written agreement of purchase and sale or negotiate and sign a letter of intent which would be followed later by an agreement. There are advantages and disadvantages to both approaches. You should discuss with a lawyer whether it makes sense to first negotiate a letter of intent or instead negotiate an agreement of purchase and sale. A letter of intent is usually a short agreement that sets out the important business terms and some legal terms of the deal.

One important early decision that a buyer and seller need to make is how to structure the sale of the business. Where the business is owned and operated by a corporation, generally, the business may be sold as either: (1) a sale by the corporation of its assets; or (2) a sale of the shares of the corporation by its shareholders. There is an adage that buyers generally prefer to buy assets (to try and avoid exposure to liabilities relating to the seller or the business) while sellers generally prefer to sell shares (as in some cases it may be tax advantageous to a seller to sell shares if, for example, there is a capital gains exemption available to the seller). But, that may not be true in many cases - it really depends on the specific deal and an analysis of all of the tax, legal and other implications. It is strongly recommended that a buyer and seller consult with a lawyer, accountant and tax advisor to get professional advice on how best to structure the business sale and to understand all of the legal, tax and other implications in choosing an asset or share sale.

As part of making an informed decision whether to buy the business, a buyer should conduct a thorough investigation of the seller, the assets and all aspects of the business to understand what it is buying and any issues, risks and liabilities. This is referred to as due diligence. A buyer should consider using an accountant and lawyer to assist in its financial and legal due diligence. Generally, a buyer will want the agreement of purchase and sale to be conditional on completing and being satisfied with its due diligence. Due diligence is usually started after a NDA or letter of intent is signed or sometimes only after an agreement of purchase and sale is signed.

As mentioned, a written agreement of purchase and sale should be negotiated and signed by the buyer and seller to set out the business and legal terms for the sale of the business. As each business is unique, an agreement needs to be tailored for the specific business and its assets and liabilities. A proper agreement of purchase and sale will set out all of the terms of the purchase and sale of the business including, for example, the price, payment terms, description of the assets or shares that are being purchased and the liabilities of the business to be assumed (if any) by the buyer, and any conditions relating to the completion of the deal. An agreement usually includes representations and warranties which are intended to be statements of fact made by the person giving them. A buyer will want the agreement to include all kinds of representations and warranties from the seller about the business including, for instance, its assets, liabilities, financial statements, customers, employees, contracts, etc. The buyer will rely on the seller’s representations and warranties as part of signing the agreement and completing the deal. If it turns out that a seller gave a false representation or warranty which resulted in the buyer suffering some loss, the buyer may have a claim to recover that loss from the seller.

Prior to closing, a buyer’s lawyer will usually perform various legal searches to confirm certain matters - for example, if there are any registrations filed against the seller under the Personal Property Security Act (Ontario) which form a lien against the assets or business being purchased.

In addition to the agreement of purchase and sale, there are usually a number of other documents that will usually need to be prepared relating to the transaction or the transfer of the business. To complete the deal, a buyer and seller will agree on a closing date. At the time of closing, the buyer will pay the purchase price and the buyer and seller will sign and exchange all of the various closing documents to transfer the assets and business from the seller to the buyer.

Please note that this is just a very short summary of some of the general legal steps involved in buying or selling a business in Ontario. It is not meant to be an exhaustive discussion of all of the legal aspects of buying or selling a business and is not intended to be legal advice or an opinion on any matter. If you are buying or selling a business, it is strongly recommended that you consult with a lawyer to assist you with all of the legal issues in completing such a transaction.

We’re pleased that so many clients have entrusted us as their legal advisors in acting on their behalf in the purchase or sale of their business. If you have any questions, please contact us.