We represent buyers and sellers of businesses and assist with the process from A to Z, including scouting out and connecting people with opportunities, engaging in corporate and financial due diligence, structuring the acquisition or sale, and completing the acquisition or sale. Having a tax lawyer advise and act on an acquisition or sale of a business can have long term advantages. We have acted on multi-million dollar acquisitions and sales of businesses in Canada.

Always consider the tax implications of a sale of a business. If presented with an offer, we can assist with minimizing the tax impact of a sale of your business.

The Process of Buying or Selling a Business

Sometimes business owners actively seek to sell their business. This usually happens either when they are ready for retirement or when they are simply looking for a new venture. We have seen situations where the business is successful, and a larger entity approaches the business owner with an offer to buy their business. In either case, the process of selling a business from the legal perspective progresses as follows:

  1. Letter of Intent

The proposed purchaser (the “Purchaser”) will prepare and send a letter of intent (“LOI”) to the business owner (the “Seller”). The LOI contains the basic fundamental elements of the proposed transaction, including the purchase price being offered, whether the Purchaser is offering to buy the assets of the business or the shares of the company (or a hybrid of the two), the proposed closing date, and the conditions of the transaction. The LOI will also usually state that the parties will enter into a definitive agreement following the signing of the LOI.

Binding vs. Non-Binding LOI

People are sometimes confused about whether an LOI is binding or not. Like any contract, the parties to an LOI can agree to any terms they want, including whether or not the LOI is binding. Sometimes, the LOI states that it is not binding, with the exception of certain provisions of the LOI which usually include, for example, the provisions relating to the parties’ obligations with respect to confidential information, which continues even after the termination of the LOI and even if a deal is not reached. It is wise to seek legal counsel as soon as you receive an LOI, even when it is not binding – and all the more so when it is binding.

  1. Definitive Agreement

The next stage of the transaction is the drafting and negotiation of the definitive agreement (the “Agreement”). The Agreement may be a share purchase agreement or an asset purchase agreement, depending on the nature of the transaction. The Agreement will contain all of the precise terms of the deal and will be in substantially more detail than the LOI. It will set out (without limitation) the purchase price, how and when the purchase price is to be paid, the closing date for the transaction, any transition period in which the Seller may stay on as an employee or consultant for the company, the conditions of the deal, and the documents that are to be exchanged on closing.

Allocation of Purchase Price

In an asset sale, a very important part of the transaction is the purchase price allocation. A Seller may think to himself: “I am selling my business for $x. Why do I care how much of the purchase price is considered to be for the equipment, how much for the inventory, and how much for the goodwill? The answer to this question is TAX. The purchase price allocation will determine how the sale of assets is taxed, as well as the Purchaser’s tax cost of those assets (and its future ability to depreciate the cost of the assets). Allocating more of the purchase price to one asset over another may actually have a significant impact on the Seller’s tax bill at the end of the transaction.

Typical Conditions of a Sale

A sale is usually conditional on the Purchaser’s satisfactory completion of its due diligence examination of the Seller’s business, affairs, financial condition, prospects, assets or operations. In other words, the Agreement is often signed but made subject to a certain time period in which the Purchaser may examine the Seller’s operations. Upon the Purchaser being satisfied with its examination, it will waive the due diligence condition by informing the Seller that it is satisfied with its investigation.

If the real property in which the business is operated is not being sold as part of the deal but is being retained by the vendor, the sale may be made conditional on the parties entering into a lease in respect of the premises. The Purchaser wants to ensure that the business may continue to operate undisturbed in the same location. Often, if the Seller is not also selling the real property, the parties may agree to a right of first refusal pursuant to which the Purchaser would have the first right to purchase the property in the event that the Seller seeks to sell the property. Where there is a third party landlord, the purchaser should make sure that the appropriate consent is given by the landlord to the assignment of the lease to the purchaser. Even where a purchaser is purchasing shares (and the lessee of the property therefore remains the same), most leases would deem a change in control of the lessee as an assignment and, therefore, the landlord’s consent is still required.

If a Purchaser is obtaining 3rd party financing in order to complete the transaction, the Purchaser should ensure that the Agreement is conditional on the Purchaser securing that financing. A Purchaser does not want to be bound to buy a business for which it does not have the money to pay. Where the Purchaser has already been approved for financing, such a condition may not be necessary.

Where the business being purchased is a franchise, the Purchaser will need to get the approval of the franchisor. The Purchaser should ensure that the Agreement is conditional on the Purchaser’s ability to obtain the consent of the franchisor, and the entering into of a franchise agreement with the franchisor. Sometimes, such as in the case of a café, the franchisor may have a certain training period requirement that the Purchaser has to undergo. In such a case, the Purchaser should ensure that the transaction is conditional on the successful completion of the training.

Business Licenses

Certain types of businesses require one or more licenses from the Federal, Provincial and/or Municipal governments. For example, in order to operate any food establishment in the City of Toronto, an owner must have a business license that is issued by the City. A proposed Purchaser of a business should ensure that it applies for all required licenses in a timely manner so as to not delay the start date of the business. This can cost the Purchaser a lot of money.

If the business serves or sells alcohol, a liquor license will be required from the Alcohol and Gaming Commission of Ontario. Such application requires background checks and can take some time. If buying a business that serves or sells alcohol, be sure to apply for such license in a timely manner.

  1. Closing Documents

Once the Agreement has been negotiated, finalized and executed by the parties, and once all conditions of the transaction have been fulfilled or waived, the parties will need to prepare and sign the final closing documents to be exchanged on the date of (or one or two days prior to) the closing. Such documents include (but are not limited to) a certificate of an officer of the Seller attesting to the truth and accuracy of the representations and warranties of the Seller (including, without limitation, those made in the purchase agreement), in the case of an asset sale, resolutions of the directors and shareholders of the Seller authorizing the Seller to complete the transaction, an officer’s certificate attaching a true copy of the corporate documents of the Seller, a receipt, a purchase price allocation, and certain HST-related documents (in the case of an asset sale) as described below. The Seller should provide a Bill of Sale which evidences the actual sale/transfer of the assets to the Purchaser.


A share sale is not subject to HST since the transfer of a security is not a taxable supply. However, if a company transfers assets in a sale, the transfer of assets is a taxable supply which would be subject to HST. Technically then, the Seller must collect, and the Purchaser must pay, HST on the transfer of assets. Although the Purchaser would be entitled to a refund of the HST it paid on the asset acquisition (via claiming “input tax credits” on its HST return), such temporary outlay can provide cashflow difficulties for the Purchaser. Recognizing this unnecessary burden, the Canadian government established a mechanism to avoid this HST issue, which can be found in section 167 of the Excise Tax Act (Canada) (Canada’s “HST” legislation). Section 167 provides the parties to a sale of “all or substantially all the assets of a business” with the ability to file a joint election for HST to not apply to the transaction. There are various technical requirements for this section to apply, but it will usually apply to a standard asset sale transaction. The HST election must be filed with the CRA with the HST return of the Purchaser in respect of the filing period in which the transaction occurred (although in some cases the election need not actually be filed with the CRA). The Seller should have the Purchaser sign an HST indemnity in the event that the Purchaser mistakenly does not file the election in accordance with its obligation to do so. Technically, the CRA can assess the Seller for the HST, so the Seller should ensure that the Purchaser follows up with its filing obligation.

  1. Closing

The closing refers to the date on which the transaction is completed, and the ownership of the business is actually transferred to the Purchaser. From the closing date and onwards, all income (or loss) of the business belongs to the Purchaser, as well as all liabilities that may arise from the date of the closing (which are not connected with any actions of the Seller that occurred prior to closing). On the date of the closing, the remaining balance of the purchase price will be transferred to the Seller. Occasionally there will be a certain percentage of the purchase price held back in escrow in the lawyer’s trust account as security in respect of any losses or liabilities that may result from any misrepresentations or actions of the parties.

  1. Post-Closing

If you have sold a business, you should consider proper tax and estate planning. In an asset sale, your company sells assets and realizes a tax consequence from the sale. However, the cost base of your shares of the company will, in many cases, be nominal. This means that if you were to pass away or dispose of the shares of the company which now holds a substantial amount of cash (or investments/real estate purchased with such cash), you will be subject to what is essentially a “double” tax. To ensure that you minimize unnecessary tax liabilities, you should engage in proper post-sale tax and estate planning.

If you have any questions about a proposed purchase or sale of a business, feel free to call or email us using the icons to the right.


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