Selling Your Business in Ontario: Legal Guide

Asset Sale vs. Share Sale: The Fundamental Decision

In Ontario, a business can be sold by selling the assets of the business (an asset sale) or by selling the shares of the corporation that owns the business (a share sale). This decision has significant tax, legal, and practical implications.

Asset sale: The buyer acquires specific assets and assumes only those liabilities they agree to take on. The seller retains the corporation and all liabilities not assumed by the buyer. Generally preferred by buyers as it provides a "clean" purchase.

Share sale: The buyer acquires the shares of the corporation and takes on all of its assets and liabilities — including hidden or unknown liabilities. Generally preferred by sellers as it may offer better tax treatment — particularly the Lifetime Capital Gains Exemption, which can shelter up to $1.25 million in capital gains on qualifying small business corporation shares.

The Due Diligence Process

A buyer will typically conduct due diligence — a thorough investigation of the business — before closing. This includes reviewing financial statements, tax returns, contracts, leases, employment agreements, intellectual property, litigation history, and regulatory compliance.

Representations and Warranties

The purchase agreement will contain extensive representations and warranties by the seller about the state of the business. Sellers are liable for breaches of these representations after closing — often for 2 years or more. Sellers should disclose issues proactively through a disclosure schedule rather than risk a post-closing warranty claim.

Non-Compete Agreements

Unlike the restrictions on employee non-competes introduced in 2021, non-compete clauses in the context of a business sale remain fully enforceable in Ontario if they are reasonable in scope, duration, and geography.

Working With Advisors

Selling a business typically requires a team: a business lawyer (deal structuring, purchase agreement, closing), an accountant (tax planning, financial due diligence), and potentially a business broker (finding buyers, valuation). Starting the preparation process early — ideally 12–24 months before sale — maximizes value.