How to Purchase a Business in Ontario

Feb 15
3 min read

Purchasing an existing business in Ontario offers a unique opportunity to enter the market with an established customer base, trained employees, and steady revenue. Yet, this process involves more than just buying equipment or a brand name. You are stepping into a business with a legal and financial history that requires careful navigation. Understanding the structure of the deal and the steps involved can help you avoid pitfalls and ensure you acquire a valuable asset rather than unexpected problems.

Choosing Between Asset Purchase and Share Purchase

One of the first and most important decisions when buying a business is whether to proceed with an asset purchase or a share purchase. Each option has distinct implications for ownership, liabilities, taxes, and financing.

Asset Purchase

In an asset purchase, you buy specific assets such as goodwill, inventory, equipment, and the business name. This approach allows you to:

Select only the assets you want
Leave behind unwanted liabilities like debts or legal claims
Avoid inheriting past tax obligations

For example, if you buy a bakery, you might choose to acquire the ovens, recipes, and customer lists but not the worn-out equipment or outstanding loans. This flexibility makes asset purchases common among buyers who want to control risk.

Share Purchase

A share purchase means buying the ownership of the corporation itself. This transfers all contracts, employees, licenses, and obligations to you as the new owner. While this can be convenient because the business continues without interruption, it also means:

Inheriting past liabilities, including tax exposure and potential lawsuits
Taking on employee obligations and contracts as they stand
Facing more complex tax and financing considerations

For instance, if you buy shares in a tech company, you acquire the entire corporate entity, including any unresolved legal issues or debts.

How to Decide

The choice between asset and share purchase depends on your risk tolerance, tax situation, and financing options. It is essential to consult with legal and accounting professionals to understand which structure fits your goals.

The Role of the Letter of Intent

Before diving into detailed investigations, buyers and sellers usually sign a Letter of Intent (LOI). This document outlines the core terms of the deal, such as:

Purchase price
Deposit amount
Conditions to be met before closing
Timeline for completing the transaction

Though mostly non-binding, the LOI sets expectations and prevents misunderstandings. It signals serious intent and helps both parties focus their efforts on due diligence and negotiation.

Conducting Thorough Due Diligence

Financial statements provide a snapshot of a business’s health, but they rarely tell the full story. Due diligence involves a detailed review of documents and operations to uncover hidden risks or obligations.

Key Areas to Investigate

Lease agreements: Check for restrictions or upcoming rent increases.
Employee contracts: Understand obligations like severance or benefits.
Secured debts: Identify loans or liens on assets.
Unpaid taxes: Look for outstanding tax liabilities or audits.
Customer contracts: Review terms and renewal conditions.
Licenses and permits: Confirm they are valid and transferable.

Due diligence is not about suspicion but clarity. For example, discovering a lease clause that prohibits subleasing could affect your expansion plans. Knowing this early helps you negotiate better terms or walk away if necessary.

Eye-level view of a business owner reviewing documents at a desk with a laptop and papers — Reviewing business documents during due diligence

Reviewing business documents during due diligence helps identify risks and opportunities.

Drafting the Purchase Agreement and Closing the Deal

The purchase agreement is the legal contract that finalizes the sale. It includes detailed terms about:

What assets or shares are included
Representations and warranties from both parties
Indemnities that allocate risk if information proves inaccurate
Closing conditions and timelines

This agreement protects both buyer and seller by clearly defining responsibilities. For example, if the seller misrepresents the business’s financial status, indemnities specify how losses will be handled.

What Happens on Closing Day

On closing day, several key actions take place:

Transfer of funds from buyer to seller
Transfer of assets or shares
Updating registrations such as HST accounts and licenses
Notifying employees and customers as required

A well-structured purchase agreement makes this process smooth and reduces surprises after the sale.

Practical Tips for a Successful Purchase

Engage professionals early: Lawyers and accountants can spot issues and advise on deal structure.
Verify all information: Cross-check financials with tax returns and bank statements.
Understand the business culture: Meet employees and customers if possible to gauge goodwill.
Plan for transition: Arrange training or support from the seller to ensure continuity.
Prepare for financing: A clean due diligence report helps secure loans or investor confidence.