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Selling a business can be a complex process, and understanding the key legal considerations is crucial for a successful deal. Sellers must be aware of legal concerns involving the type of sale structure, the terms included in the purchase agreement, and protecting confidential information during the sale process. This blog post will provide an overview of the main legal considerations for parties seeking to sell a business in Ontario.

Structuring the Sale

An important consideration for the seller is to determine whether to structure the sale as an asset sale or a share sale. An asset sale involves selling individual assets and liabilities of the business rather than the company’s shares. As the name implies, a share sale consists of acquiring the shares of the company, which includes ownership of its assets and liabilities.

Both structures have benefits and drawbacks, and understanding the consequences of each is essential to give effect to the seller’s wishes and intentions.

Asset v. Share: Tax Considerations

It is generally the case that sellers prefer to sell shares while buyers prefer to buy assets. These preferences are generally due to the tax consequences of this type of transaction.

The seller should be cognizant of the immediate income tax consequences of selling their business within the year of sale. Structuring the sale as a share sale allows the seller to take advantage of taxation of capital gains, as, for tax purposes, only half of the realized capital gain is included as taxable income. This is particularly important for individual sellers and for sellers recognized as qualified small business corporations. Different tax consequences can arise if the seller chooses to structure the sale as an asset sale. For example, ordinary income may arise from the recapture of capital cost allowance on the sale of depreciable property or the profit realized on the sale of inventory.

Furthermore, when shares are sold in a corporation, the profits are paid to the shareholders and are only taxed at the shareholder level. When selling assets, the profits are taxed at two levels; to the corporation when the assets are sold and to the shareholders when the proceeds are distributed to the shareholders (either as a dividend or as a distribution). For these reasons, the seller generally prefers to sell shares in the corporation.

Nevertheless, there are situations when the seller may prefer to sell assets:

  1. The seller may have operating losses in the business which can be used to offset the income or capital gains from the sale;
  2. The seller may wish to take advantage of small business deductions; and
  3. The tax costs of the assets are greater than the purchase price of the shares.

These factors are important to consider for a seller wishing to minimize tax liability and whether an asset sale or share sale best serves their specific needs.

Key Terms in a Purchase Agreement

The purchase agreement is the essential document and the cornerstone of the transaction. It is a legally binding contract that outlines the terms and conditions of a sale between a buyer and a seller. The seller should pay particular attention to the following to ensure all representations and agreed-upon terms are included:

Purchase Price

The agreement should include the agreed-upon purchase price for the asset or business being sold, whether it is fixed or based on a particular calculation.


The agreement may include specific closing procedures and due diligence obligations that the seller must complete.

Representations and Warranties

The agreement may include the statement of certain facts pertaining to the business at the time of sale. The seller must examine these statements and ensure these representations are accurate.

Closing Conditions

The closing conditions are fundamental as they must be complete before the transaction is enacted. These can include financing that is required to complete the transaction, consents and approvals from shareholders, transfers of licences and permits, and various employment matters.

The seller must be hypervigilant of the terms included in the purchase agreement to understand their specific obligations for the transaction to close.

Protecting Confidential Information with an NDA

In order to allow the buyer to complete the necessary due diligence on the business being sold, the seller may be required to disclose confidential information. This exposes the seller to significant risk as the buyer is not under any obligation to protect this information. Therefore, it is common for sellers to require the buyer to enter into a non-disclosure agreement (“NDA”) to protect against disclosure.

When drafting an NDA, the seller should be careful to include a specific definition of confidential information that protects the information being shared. The seller must adequately define the situations where the obligations included in the NDA are excluded, such as where the information is publicly available. A properly drafted NDA can offer significant protection to ensure that the buyer is only using the information as a means to evaluate the potential purchase of the business.

The Business Lawyers at Bader Law Advise Clients on Selling and Purchasing a Business

The skilled business law team at Bader Law provides tailored business sale advice to our clients and other business matters, such as corporate restructuring, licensing and shareholder disputes. We work closely with our clients to understand their needs and help them determine the needs of the business seller to help reduce liability and maximize profit. If you have questions regarding your business structure or require assistance with incorporation, call us at 289-652-9092 or contact us online.