Buying a Business in Ontario: Legal Issues To Check Before You Sign

So you have found a business you want to buy. Maybe you have had a few conversations with the seller, and things are moving in the right direction. It is exciting but it is also the point where a lot of buyers get into trouble by moving too fast.

Buying a business in Ontario involves more than agreeing on a price. There are contracts to review, liabilities to assess, leases to deal with, employees to think about, and a stack of documents to get right before you hand over any money. This article walks through the key things every buyer should understand before signing anything.

Start With the Letter of Intent, But Do Not Treat It As Just a Formality

Most business purchases begin with a letter of intent, sometimes called an LOI. It sets out the basic terms of the deal: the price, what is being purchased, the expected timeline, and whether there is an exclusivity period during which the seller cannot negotiate with other buyers.

An LOI is usually not legally binding in its entirety, but some parts of it, like confidentiality and exclusivity clauses often are. Before you sign one, it is worth having a lawyer look it over. The terms you agree to at this early stage can shape the entire negotiation that follows.

Asset Purchase or Share Purchase: This Decision Matters

One of the most important decisions in any business purchase is how the deal is structured. In Ontario, most business acquisitions are done as either an asset purchase or a share purchase, and the two are very different.

In an asset purchase, you buy specific things from the business: the equipment, customer contracts, goodwill, inventory, and possibly the lease. You are generally not taking on the seller's past debts or liabilities unless you specifically agree to. Most buyers prefer this structure for that reason.

In a share purchase, you buy the corporation itself. That means you step into the seller's shoes, including any tax liabilities, outstanding claims, or other issues the company may have had before you arrived. Share purchases can sometimes be more attractive to sellers from a tax perspective, but they tend to require more thorough due diligence on the buyer's side.

Which structure is better for you depends on your situation, tax position, and risk tolerance. This is one area where getting proper legal and accounting advice early makes a real difference.

Due Diligence: Do Not Skip This Step

Due diligence is the process of verifying what you are actually buying before you commit. It sounds straightforward, but it is easy to underestimate how much there is to review.

Depending on the business, due diligence may include reviewing:

• Financial statements and tax filings for the last several years

• Outstanding debts, liens, or judgments against the business

• Supplier and customer contracts, and whether they can be transferred

• Pending or threatened litigation

• Intellectual property ownership (trademarks, domain names, proprietary processes)

• Licences, permits, and regulatory compliance

A purchase agreement will typically include representations and warranties from the seller about the state of the business. But representations only go so far. You are far better off finding problems during due diligence than discovering them after the deal closes.

The Lease: A Critical Piece Many Buyers Overlook

If the business operates out of a rented space, the lease deserves serious attention. A few things to look for:

• Does the lease allow for assignment or transfer to a new owner? Many commercial leases in Ontario require the landlord’s consent, and the landlord is not always obligated to agree.

• How much time is left on the lease? A short remaining term can be a real problem if the business depends on that location.

• Are there rent increases built in? Escalation clauses can affect the long-term economics of what you’re buying.

• Are there any restrictions on how the space can be used?

Negotiating a lease assignment or a new lease directly with the landlord is often a condition of the purchase. If the lease falls through, so does the deal. It is worth getting this sorted out early.

Employees: What Comes With the Business

When you take over a business, there may be employees whose rights and obligations carry over to you, depending on how the deal is structured. In an asset purchase, the employees of the seller do not automatically become your employees, but if you take on the business and substantially the same employees, you may be considered a “successor employer” under Ontario’s Employment Standards Act, 2000. This can affect things like termination entitlements and length-of-service calculations.

In a share purchase, employee contracts generally continue because the corporation itself is changing hands.

Either way, reviewing all employment agreements, benefit plans, and any outstanding issues with staff before closing is important. You do not want to inherit an unresolved employment dispute.

What Should Be in the Purchase Agreement

The purchase agreement is the main contract that governs the deal. It should clearly set out:

• Exactly what is being purchased (and what is not)

• The purchase price and how it will be paid

• Conditions that must be met before closing, such as due diligence approval, lease transfer, or financing

• Representations and warranties from the seller

• What happens if a representation turns out to be false

• Any holdback or adjustment provisions

• Non-compete or non-solicitation terms, if applicable

A poorly drafted purchase agreement can leave you with limited recourse if something goes wrong after closing. Having a lawyer draft or review this document is not optional if you want to protect yourself.

Closing Documents and What Happens at the End

Closing is when the deal actually happens: money changes hands, ownership transfers, and you become the new owner. But there is a lot that needs to come together to get there.

Depending on the transaction, closing documents may include a bill of sale, assignment agreements for contracts and leases, officer certificates, corporate resolutions, and various third-party consents. If financing is involved, your lender will have their own requirements too.

A lawyer can coordinate the closing process and make sure everything is in order before any funds are released. Having this handled properly can save you from delays, or worse, a deal that falls apart at the last minute.

A Few Practical Reminders

• Do not sign anything, not even an LOI, without understanding what you are agreeing to.

• Get a lawyer and an accountant involved early, not just at the end.

• Take due diligence seriously. Ask for everything and review it carefully.

• Make sure the purchase agreement clearly reflects what you negotiated.

• Plan for the transition: customers, staff, suppliers, and vendors will all need to be dealt with.

Buying a business can be one of the best decisions you ever make. But doing it right takes preparation, the right team, and a clear understanding of what you are getting into before you sign.

FREQUENTLY ASKED QUESTIONS

Q: Do I really need a lawyer to buy a business in Ontario, or can I use a standard template?

A: Using a standard template for a business purchase can leave significant gaps in your protection. Every business transaction is different, and what is standard for one deal may be completely wrong for another. A lawyer can help you identify risks specific to your situation, negotiate terms that protect you, and make sure the documents reflect what you actually agreed to. In most cases, the cost of legal advice is small compared to what can go wrong without it.

Q: What is the difference between an asset purchase and a share purchase in Ontario?

A: In an asset purchase, you buy specific assets of the business, like equipment, goodwill, and contracts without necessarily taking on the seller’s past liabilities. In a share purchase, you buy the corporation itself, which means you inherit everything, including any hidden liabilities or obligations. The right structure for you depends on your circumstances, the nature of the business, and advice from your lawyer and accountant.

Q: What happens to employees when I buy a business in Ontario?

A: It depends on how the deal is structured. In a share purchase, employment contracts generally continue as-is. In an asset purchase, the situation can be more complex, you may have obligations under the Employment Standards Act, 2000 if you are considered a successor employer. Before closing, you should review all employment agreements and understand what obligations you may be taking on. A lawyer can help you assess your exposure.

Q: Can I back out of a business purchase after signing a letter of intent?

A: It depends on what the LOI says. Letters of intent are often described as non-binding, but that does not mean every part of them is. Confidentiality, exclusivity, and certain other provisions may be legally enforceable. Before you sign an LOI, and certainly before you try to walk away from one, you should speak with a lawyer to understand your rights and obligations under the specific document.

CONTACT

Buying a business involves more moving parts than most people expect. If you are considering a business acquisition in Ontario and want to understand your options, DevLaws can help. Contact DevLaws today to schedule a consultation and talk through your situation.

contact@devlaws.com  |  +1 437 290 0424  |  devlaws.com

DISCLAIMER

This article is provided for general information purposes only and does not constitute legal advice. It is not intended to create a lawyer-client relationship. Laws and regulations can change, and the information here may not reflect the most current developments. Every transaction is different, and the information in this article may not apply to your specific circumstances. If you are considering purchasing a business in Ontario, you should consult a qualified lawyer for advice tailored to your situation. DevLaws does not guarantee any particular outcome or result.