Years of early mornings, payroll weeks, and difficult customers go into a business, and most owners only get to sell one once. Yet many start the process in the worst possible way: a buyer shows up, a number gets mentioned, and only then does the owner go looking for the corporate records last seen in a box in the basement.
A sale tends to go better when preparation starts early, ideally a year or two before you plan to leave. Buyers pay more readily for businesses they can understand and verify. Tax planning for a sale also takes lead time, sometimes years. And sellers who prepare can avoid the common surprise of receiving a sale price and then discovering how much of it is tied up, taxed, or still exposed to claims.
This article is general information for owners of Ontario businesses, and it does not provide legal or tax advice. Every sale depends on its own facts, and you should have a lawyer and an accountant advising you on yours.
Ask What a Clean Exit Means to You
Before calling a broker, decide what you actually want. Some sellers want the highest possible price. Others place more value on a quick and certain closing, protecting long-time employees, keeping the family name on the door, or staying on for a few years in a reduced role. A sale to a key employee or a relative may produce less money but be far more satisfying.
Your priorities change the deal. An owner who wants a clean break will avoid an earn-out, where part of the price depends on future performance. An owner who wants the highest headline price may accept one. Having the answer ready will help you keep your bearings when a buyer’s offer arrives.
Look at the Business the Way a Buyer Would
Assume a careful buyer will go through everything. A few weeks spent acting like that buyer can do more for the price than any sales pitch.
Separate personal from business. Personal vehicles, family cell phones, and vacation expenses run through the company make the earnings harder to demonstrate. Your accountant can present adjustments, but buyers discount what they cannot verify, and unreported cash income cannot simply be added back. It may also expose you to questions you do not want asked.
Reduce dependence on you. If every client calls your cell, every supplier deal is in your head, and no one else knows how to quote a job, then the buyer is paying for something that will leave when you do. Write down processes and bring along a manager. A business that ran smoothly during your last vacation is easier to sell.
Tidy up customer risk. If one client is half your revenue, try to get a longer written contract, and find out whether it can be transferred.
Deal with the small problems. Late HST filings, an expired licence, a dispute with a former employee, an unresolved WSIB matter, or a piece of broken equipment can each seem trivial. In due diligence, they suggest that there may be more hidden problems, and buyers adjust price and terms accordingly.
Put the Paperwork in Order
Your lawyer can help you assemble what a buyer will ask for. Many of these items are fairly straightforward to fix now and awkward to fix during a deal.
- Minute book. Articles, by-laws, resolutions, registers, and share certificates, along with the register of individuals with significant control. Small companies often have gaps here. If shares were promised to a relative years ago but never issued, or a former partner’s departure was never documented, resolve this first.
- Corporate filings. Confirm that Ontario Business Registry filings are up to date and that the listed directors are correct.
- Intellectual property. Confirm that the company owns its name, logo, website, domain name, and social media accounts. Those registered personally to you or a web designer should be transferred. Consider registering a valuable trademark, and speak to a lawyer about protecting your intellectual property.
- Contracts. Gather your lease, supplier contracts, customer agreements, and equipment leases, and note which require consent for an assignment or change of control.
- Lease. Check remaining term and renewal rights. Buyers and their lenders typically want security of tenure. Extending a lease before the sale may help, and it is a good topic to raise with your landlord in Brampton well ahead of time, with care about what you disclose.
- Employees. Have current employment contracts on file, and resolve any questions about workers treated as contractors.
- Security. Find out what is registered against the business and what has to be paid out to deliver clear title. Old registrations for loans long since repaid may still be on record.
Having all of this in an organized digital folder also gives a strong first impression and shortens the process.
Shares or Assets: The Central Negotiation
In a share sale, you sell your shares of the corporation, and the buyer gets the company with its assets, contracts, and liabilities. In an asset sale, the corporation sells selected assets, keeps what it does not sell, including unassumed liabilities, and you then have to wind it down or continue it.
Sellers usually prefer a share sale for two reasons. It leaves the historical liabilities with the company, which belongs to the buyer afterward (subject to the protections they will negotiate). And it may qualify for favourable tax treatment.
Buyers usually prefer assets, because they can pick what they take and may be able to deduct the purchase cost more effectively. Businesses with liabilities that are hard to quantify, or those in risky sectors, often sell as asset deals for this reason. The structure will affect the price, so compare after-tax results and do not fixate on the headline figure.
Tax Planning Takes Lead Time
This is the point on which early preparation most clearly pays off.
Canadian residents selling shares of a qualified small business corporation may be able to claim the lifetime capital gains exemption, which can shelter a significant amount of gain. The limit has been in the range of $1.25 million per person, and the figure can change, so your accountant should confirm the current amount. Where shares are held by family members or a trust, more than one exemption might be available in some cases, subject to complex rules.
The company generally has to meet tests on the share ownership and the use of its assets. In broad terms, this involves a holding period of 24 months and thresholds for how much of the company’s assets are used in an active business in Canada, both at the time of sale and during that period. A company with a large investment portfolio or excess cash may fail the tests unless it is “purified” in advance, and that may take planning well before a sale. If you only learn about this when you receive an offer, it may be too late to get the full benefit.
Other tax topics to raise with your accountant include how the price is allocated in an asset sale, HST on asset transactions, any alternative minimum tax, capital dividend planning, and whether to spread the proceeds over several years using a vendor take-back. Your estate plan and wills may also need updating once your wealth has changed form from a business to cash.
Confidentiality and Choosing Your Buyer
Word that a business is for sale can unsettle staff, worry customers, and invite competitors to circle. In a community with close ties like Brampton’s, it can travel quickly. Have prospective buyers sign a confidentiality agreement before you share anything meaningful. Release sensitive details, such as customer names and key employee pay, only in later stages and preferably only to a serious buyer. If the buyer is a competitor, be especially cautious.
Ask for evidence that a buyer can actually pay. A letter of intent will usually include price, structure, due diligence period, and exclusivity. It is often said to be “non-binding,” although certain parts may well bind you. Exclusivity is a real concession, because you take your business off the market during that time. Keep it short and tied to clear progress. Have a lawyer review the letter before you sign it. Important points left vague at this stage are hard to win back later on. A lawyer with experience in business purchases and sales can help you set this up.
Employees and the Sale
Your staff will have questions, and legal obligations come with them. Under section 9 of Ontario’s Employment Standards Act, 2000, where a business is sold and the buyer employs the seller’s employee, that person’s prior service generally carries over for ESA purposes. So buyers will review those obligations closely.
If the buyer does not hire some employees in an asset sale, your company may be responsible for termination and severance pay, plus any common-law entitlements. Share sales do not usually end employment because the employer stays the same. The agreement should state who pays what. Plan when and how you will tell staff, and consider retention bonuses for key people if the buyer wants them to stay.
What the Buyer Will Ask You to Promise
The purchase agreement usually contains a series of statements about the business, called representations and warranties, along with an indemnity if they turn out to be untrue. This is where your risk continues after closing. Read with care, because a clean exit depends largely on these clauses.
Negotiating points include:
- Knowledge qualifiers. “To the seller’s knowledge, there are no threatened claims” is safer for you than an absolute promise.
- Survival period. How long can the buyer make claims? Try to agree on a defined period for general representations, though tax and title matters often run longer.
- Caps and baskets. Your maximum liability could be limited to a portion of the price, with a threshold that small claims must exceed before you pay anything.
- Disclosure schedules. Disclose known issues fully and in writing. Well-prepared disclosure helps protect you from later claims that you hid something.
- Personal exposure. Buyers may ask you personally to back the company’s promises. Know what you are signing.
Other Ways the Price Can Move
Be wary of a headline price that sounds generous until you look at the terms.
A holdback keeps part of the price in escrow for a period. A vendor take-back means you are lending the buyer part of the price; if so, ask for security, such as a general security agreement, and possibly a personal guarantee. An earn-out pays you later based on results over which you may no longer have control. If you accept one, define how it is measured, who controls the business in the meantime, and what happens if it is sold again. A working capital adjustment changes the final price based on the receivables, inventory, and payables at closing, so make sure you understand how it is calculated.
Non-Competes and Your Next Chapter
A buyer paying for goodwill will almost certainly want you to agree not to compete for a period of time within a defined area. Courts are more willing to enforce such covenants in a sale of a business than in employment, but they still need to be reasonable. Ontario’s ban on employee non-competes contains a limited exception for sales where the seller becomes the buyer’s employee right after closing, so if you plan on staying on, have the wording checked. Think through what you may want to do afterward, and negotiate the scope with that in mind. If you may wish to return to a related line of work, say so now.
Agree in writing on any transition role: length, pay, duties, and when it ends. Many sellers find that staying “for a few months” in a company they used to control is harder than they expected.
After Closing
Closing day brings a stack of documents, payouts to lenders, discharges of security, and funds moving through the lawyers’ trust accounts. It is not quite the end. In an asset sale, your company may still need to pay its debts, file final returns, and eventually be dissolved. In a share sale, you should resign from your positions and make sure personal guarantees you gave for leases and loans are released. This one is often missed. A guarantee left in place can come back to bite you years later if the buyer defaults.
Keep your records for the period advised by your accountant and lawyer, and keep your deal documents for at least as long as any claims can be made.
If a sale is on your horizon, even a distant one, it can be worth having an early discussion. The firm’s corporate law team can review your readiness and work alongside your accountant. A sale you have prepared for leaves you with more choices, and it can let you walk out the door knowing that the deal is truly finished.