Buying or selling an existing business is a fundamentally different transaction from starting one from scratch. Whether you are an entrepreneur looking to acquire an established business rather than build one from the ground up, or a business owner ready to retire, exit, or move on to a new venture, the legal structure of the transaction has significant financial and legal consequences that are easy to underestimate.
The single most important decision in any business purchase or sale, one that shapes almost everything else about the transaction, is whether the deal is structured as an asset sale or a share sale. This choice affects what liabilities the buyer takes on, how much tax each party pays, what happens to existing contracts and employees, and how much due diligence is realistically required. Getting this decision wrong, or entering the transaction without understanding its implications, can be a very expensive mistake.
This guide explains the legal structure of business acquisitions in Ontario, the due diligence process, the key terms in a purchase agreement, how businesses are valued, and how to find a corporate lawyer in the GTA who speaks your language. This guide is a companion to our guide on starting a business in Ontario, which covers building a new business from the ground up; this guide focuses specifically on acquiring or exiting an existing one.
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Asset Sale vs Share Sale: The Central Decision
Every business acquisition in Ontario is structured as either an asset sale or a share sale (assuming the business operates as a corporation; unincorporated businesses can only be sold through an asset sale, since there are no shares to transfer). The two structures produce very different outcomes for both buyer and seller.
Asset Sale
In an asset sale, the buyer purchases specific assets of the business (equipment, inventory, customer contracts, intellectual property, goodwill, and so on) rather than the corporation itself. The seller’s corporation continues to exist after the sale, now holding the sale proceeds instead of the business assets, and typically winds down or continues with a different business.
Asset sales are generally favoured by buyers because they allow the buyer to select specifically which assets and liabilities to take on, leaving behind unknown or contingent liabilities that may exist within the seller’s corporation, such as undisclosed litigation, tax reassessments, or environmental issues connected to the corporation’s history. This selectivity is the primary reason buyers often prefer, or insist on, an asset sale structure.
Share Sale
In a share sale, the buyer purchases the shares of the corporation itself, acquiring the entire legal entity, including all of its assets, contracts, and liabilities, known and unknown, existing at the time of closing. The business continues to operate as the same legal entity; only the ownership of its shares changes hands.
Share sales are often favoured by sellers, particularly for tax reasons discussed below, and can be simpler in some respects since existing contracts, licenses, and permits held by the corporation generally continue without needing to be individually transferred or reassigned to a new legal entity. The trade-off for the buyer is inheriting the full history and liability profile of the corporation, which makes thorough due diligence especially critical in a share sale.
Comparing the Two Structures
| Asset Sale | Share Sale | |
| What is purchased | Specific assets and selected liabilities | The corporation itself, all assets and liabilities |
| Buyer’s liability exposure | Limited to what is explicitly assumed | Full corporate history, known and unknown liabilities |
| Contracts and permits | Often require consent to assign or reissue | Generally continue automatically with the corporation |
| Employees | New employment relationship (or deemed continuation under employment law in some cases) | Employment relationship continues unchanged |
| Tax treatment for seller | Often less favourable; may trigger higher tax on sale | Can qualify for the Lifetime Capital Gains Exemption on qualifying shares |
| Typical buyer preference | Often preferred by buyers for liability protection | Often preferred by sellers for tax reasons |
The right structure for any specific transaction depends on the nature of the business, the specific liabilities and risks involved, and the tax positions of both parties. It is common for buyers and sellers to have opposing preferences on this exact issue, which itself becomes a significant point of negotiation, sometimes resolved through pricing adjustments that account for the different risk and tax profiles of each structure.
Tax Considerations
Tax treatment is one of the most significant factors driving the asset sale versus share sale decision, and it is an area where a corporate lawyer working alongside an accountant is essential.
For sellers, a share sale of a Canadian-controlled private corporation can potentially qualify for the Lifetime Capital Gains Exemption (LCGE), which allows an individual seller to shelter a significant amount of capital gains from tax on the sale of qualifying small business corporation shares, provided specific conditions relating to the corporation’s activities and asset composition are met in the lead-up to the sale. This exemption can represent a substantial tax saving and is often the primary reason a seller strongly prefers a share sale structure over an asset sale.
For buyers, an asset sale can offer tax advantages of its own, including the ability to allocate the purchase price among different classes of assets in a way that creates favourable tax attributes going forward, such as depreciation on acquired equipment or amortization of acquired goodwill. Buyers and sellers often negotiate specifically over how the purchase price is allocated among asset classes in an asset sale, since this allocation affects each party’s tax position differently.
Given the complexity and the significant amounts of money potentially at stake, tax planning for a business purchase or sale should begin well before a deal is finalized, ideally as soon as a sale is being contemplated, not after terms have already been agreed to.
The Due Diligence Process
Due diligence is the process by which a buyer investigates a target business before completing the purchase, and it is one of the most important protections available to a buyer, particularly in a share sale where the buyer is inheriting the corporation’s full history.
What Due Diligence Typically Covers
- Financial due diligence: reviewing financial statements, tax filings, accounts receivable and payable, and the general financial health and accuracy of the business’s books.
- Legal due diligence: reviewing corporate records, material contracts, leases, outstanding or threatened litigation, intellectual property ownership, and regulatory compliance.
- Employment due diligence: reviewing employment contracts, outstanding employee entitlements, any pending grievances or claims, and compliance with employment standards.
- Tax due diligence: confirming the corporation’s tax filing history and identifying any outstanding tax liabilities or reassessment risk, particularly important in a share sale.
- Operational due diligence: assessing the business’s key customer and supplier relationships, day-to-day operations, and dependence on the current owner’s personal involvement or reputation.
Why Due Diligence Matters More in a Share Sale
Because a share sale transfers the entire corporate entity, including liabilities the buyer may not even be aware of at the time of closing, thorough due diligence is especially critical. Undisclosed litigation, unpaid taxes, or environmental liabilities connected to the corporation’s history can become the new owner’s problem after closing, even if they had nothing to do with creating them. This is one of the main reasons buyers in a share sale negotiate strong representations, warranties, and indemnification provisions in the purchase agreement, discussed below, as a further layer of protection beyond due diligence itself.
The Purchase Agreement: Key Terms
The purchase agreement (sometimes called an asset purchase agreement or share purchase agreement, depending on the structure) is the central legal document governing the transaction. Several provisions deserve particular attention.
Representations and Warranties
Representations and warranties are statements the seller makes about the business, its financial condition, its compliance with laws, the accuracy of its financial statements, and the absence of undisclosed liabilities, among many other matters. These provisions allocate risk between the parties: if a representation turns out to be false, the buyer generally has a contractual remedy against the seller, which is a critical protection, particularly in a share sale.
Indemnification
Indemnification provisions specify how losses arising from a breach of the agreement, including a false representation or warranty, will be compensated after closing. These provisions typically address the amount of any cap on indemnification liability, any minimum threshold before a claim can be made, and how long after closing the seller remains responsible for potential claims. Negotiating indemnification terms is often one of the most contested parts of finalizing a purchase agreement.
Non-Competition and Non-Solicitation Clauses
Buyers typically require the seller to agree not to compete with the business or solicit its customers and employees for a defined period following the sale. Unlike non-competition clauses in an employment relationship, which are now largely unenforceable against employees under Ontario’s Employment Standards Act, non-competition clauses entered into as part of the sale of a business are generally enforceable, provided they are reasonable in scope, geographic area, and duration. A well-drafted non-compete is often essential to protecting the value the buyer is actually paying for, namely the ongoing goodwill and customer relationships of the business.
Non-competition clauses work very differently in an employment relationship than in a business sale. See our guide on employment contracts and non-competition clauses in Ontario for how non-competes and non-solicits work for employees.
Earnouts and Vendor Financing
Not every business purchase is paid entirely in cash at closing. An earnout structures part of the purchase price as contingent payments made after closing, based on the business achieving certain financial targets, which can help bridge a valuation gap between what a buyer is willing to pay upfront and what a seller believes the business is worth, particularly if future performance is uncertain. Vendor financing (or a vendor take-back) involves the seller financing part of the purchase price themselves, effectively acting as a lender to the buyer, secured against the business or its assets. Both structures introduce additional complexity and risk that should be carefully negotiated and documented.
Business Valuation
Determining what a business is actually worth is more art than science, and different valuation approaches can produce significantly different results for the same business.
- Asset-based valuation: values the business based on the net value of its underlying assets, generally most relevant for asset-heavy businesses with limited ongoing earning power beyond their tangible assets.
- Earnings-based valuation (multiple of EBITDA or cash flow): values the business as a multiple of its earnings before interest, taxes, depreciation, and amortization, commonly used for established, profitable businesses with a track record of earnings.
- Market-based valuation: compares the business to similar businesses that have recently sold, where comparable transaction data is available.
- Discounted cash flow: projects future cash flows and discounts them to present value, more common for larger or growth-oriented businesses with more predictable future performance.
For most small and medium-sized business transactions, a formal valuation by a qualified business valuator is a worthwhile investment, particularly where the parties are not closely related or where financing is involved and a lender requires an independent valuation to support the purchase price.
Employee Considerations
How employees are treated differs significantly between an asset sale and a share sale. In a share sale, employees continue working for the same legal entity without interruption, since the corporation itself has not changed, only its ownership. In an asset sale, the situation is more complex: Ontario employment law contains provisions addressing what happens to employees when a business is sold as a going concern, and in many circumstances a purchasing employer in an asset sale is considered to continue the employment relationship for purposes of calculating length of service and certain entitlements, even though technically a new employer is involved. See our guide on wrongful dismissal in Ontario for a fuller explanation of how employment length and entitlements are calculated, which becomes directly relevant when structuring the employee transition in a business sale.
The Closing Process
Closing a business purchase or sale involves the exchange of the purchase price for the assets or shares being sold, the delivery of any required closing documents (such as resignations of directors and officers in a share sale, or bills of sale and assignments in an asset sale), and the satisfaction of any closing conditions negotiated in the purchase agreement, such as obtaining necessary third-party consents to assign key contracts or leases. Legal counsel for both parties typically coordinates closing to ensure all conditions are met and documents are properly executed and exchanged simultaneously.
Why a Corporate Lawyer Who Speaks Your Language Matters
Business acquisitions involve complex, high-stakes documents where the precise wording of a representation, an indemnification clause, or a non-compete provision can have significant financial consequences years down the line. For business owners and buyers whose first language is not English, ensuring genuine, complete understanding of these terms, not just a general sense of the deal, matters enormously.
A corporate lawyer who speaks your language can walk through the purchase agreement clause by clause in the language you understand most precisely, ensure that due diligence findings are communicated clearly, and that you fully understand what you are taking on or giving up in the transaction. Our Language Guides explain the legal landscape for specific communities across the GTA, including Mandarin, Cantonese, Hindi, Punjabi, Urdu, Tamil, Korean, Italian, Portuguese, Ukrainian, Russian, Hebrew, Farsi, Arabic, Spanish, and French. For a general guide on finding a multilingual lawyer, see our guide on how to find a multilingual lawyer in Toronto.
How to Find a Corporate Lawyer in the GTA
To find a lawyer, visit the main lawyers directory, filter by Corporate Law and your language, and narrow by location. For advice on choosing and engaging a lawyer, see our guides on questions to ask before hiring a lawyer, the first legal consultation, and what to expect in a retainer agreement. For an explanation of legal fees, see our guide on how much a lawyer costs in Ontario. Always confirm the lawyer is currently licensed by checking our verification process or the Law Society of Ontario’s public register.
Frequently Asked Questions
What is the difference between an asset sale and a share sale in Ontario?
In an asset sale, the buyer purchases specific assets of a business (equipment, inventory, contracts, goodwill) rather than the corporation itself, allowing the buyer to select which assets and liabilities to take on. In a share sale, the buyer purchases the shares of the corporation, acquiring the entire legal entity along with all of its assets and liabilities, known and unknown. Buyers often prefer asset sales for liability protection, while sellers often prefer share sales for tax reasons, particularly the potential availability of the Lifetime Capital Gains Exemption on qualifying shares. The right structure depends on the specific business, the risks involved, and the tax positions of both parties.
Why is due diligence more important in a share sale than an asset sale?
In a share sale, the buyer acquires the entire corporate entity, including its full history of liabilities, whether known or unknown at the time of closing, such as undisclosed litigation, unpaid taxes, or environmental liabilities. In an asset sale, the buyer can generally select which specific assets and liabilities to assume, leaving unknown or unwanted liabilities behind with the seller’s corporation. Because a share sale carries this broader inherited risk, thorough due diligence covering financial, legal, employment, and tax matters is especially critical, and strong representations, warranties, and indemnification provisions in the purchase agreement provide an additional layer of protection.
Can a seller include a non-competition clause when selling a business in Ontario?
Yes. Unlike non-competition clauses in an employment relationship, which are now largely unenforceable against employees under Ontario’s Employment Standards Act, non-competition clauses entered into as part of the sale of a business are generally enforceable, provided they are reasonable in scope, geographic area, and duration. Buyers typically require sellers to agree not to compete with the business or solicit its customers and employees for a defined period following the sale, since this protects the ongoing goodwill and customer relationships that the buyer is paying for.
How is a small business valued in Ontario?
There is no single method; different approaches can produce different results for the same business. Common methods include asset-based valuation (the net value of the business’s underlying assets), earnings-based valuation (a multiple of earnings before interest, taxes, depreciation, and amortization, commonly used for established profitable businesses), market-based valuation (comparing to similar recently sold businesses), and discounted cash flow (projecting and discounting future cash flows, more common for larger businesses). For most small and medium-sized transactions, a formal valuation from a qualified business valuator is worthwhile, particularly if financing or an independent negotiation between unrelated parties is involved.
What happens to employees when a business is sold in Ontario?
This depends on the transaction structure. In a share sale, employees continue working for the same legal entity without interruption, since the corporation itself has not changed. In an asset sale, Ontario employment law contains specific provisions addressing what happens to employees when a business is sold as a going concern; in many circumstances, a purchasing employer is considered to continue the employment relationship for purposes of calculating length of service and certain entitlements, even though a new legal employer is technically involved. See our guide on wrongful dismissal in Ontario for more on how employment length and entitlements are calculated.
Find a Corporate Lawyer in the GTA Who Speaks Your Language
Buying or selling a business is one of the most consequential transactions an entrepreneur will undertake. Having a corporate lawyer who can explain the structure, the risks, and the key terms clearly in your first language protects your interests at every stage.
Lawyers Who Speak connects GTA entrepreneurs with verified, Law Society of Ontario-licensed corporate lawyers who speak their language. Search by language and practice area to find the right lawyer for your transaction.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Business acquisitions are highly fact-specific and involve significant tax considerations. Please consult a qualified corporate lawyer, and where appropriate an accountant, for advice about your specific transaction.