Buying a Business in Ontario: The Complete Legal Checklist

Before any negotiation on price, buyers must decide whether they are purchasing assets of the business or shares of the corporation that operates it. This is not merely a structural preference — it determines tax treatment, liability exposure, and the complexity of what needs to be transferred.

Asset Purchase: You buy specific assets (equipment, inventory, customer lists, contracts, goodwill, intellectual property) and assume only the liabilities you explicitly agree to take on. The business entity stays with the seller. This structure is generally preferred by buyers because:

• You avoid inheriting unknown or undisclosed historical liabilities of the seller's corporation
• You can step up the cost base of depreciable assets, creating future tax deductions
• You have flexibility to cherry-pick which assets and liabilities you want

Share Purchase: You buy the shares of the operating corporation and step into the shoes of the previous owner. The corporation — with all of its assets, contracts, liabilities, and history — now belongs to you. This is often preferred by sellers for tax reasons (potential qualification for the Lifetime Capital Gains Exemption) and by buyers when:

• The business holds licenses, permits, or government approvals that are not transferable but remain with the entity
• Key contracts cannot be assigned without consent
• The seller will not agree to an asset deal

In a share deal, buyers protect themselves through comprehensive representations and warranties from the seller, supported by indemnities and potentially a representations and warranties insurance policy.

Legal due diligence in a business acquisition is the process of examining the target business's legal affairs to identify risks, confirm representations, and inform negotiating positions.

Corporate Records: - Articles of incorporation and all amendments - Shareholder agreements and unanimous shareholder agreements - Corporate minute book (resolutions, share register, director/officer register) - Any outstanding share subscription agreements or rights to acquire shares

Material Contracts: - Customer contracts — particularly any change of control provisions that trigger termination or require consent - Supplier and vendor agreements - Service agreements and professional engagements - Distribution or licensing agreements - Non-compete and non-solicitation agreements in favour of the business

Intellectual Property: - Trademark registrations and pending applications - Domain names and social media accounts (verify ownership is in the business, not the founder personally) - Software licenses and whether they are transferable - Any IP assignment agreements from employees or contractors

Real Property: - Commercial lease — assignment clause, remaining term, renewal options, landlord consent requirements - Any owned real property (title searches, environmental status, encumbrances)

Employment and HR: - Employment agreements for key employees - Employee benefits and obligations under ESA (Employment Standards Act) - Any employment-related claims or disputes - Compensation arrangements for employees not on formal contracts

Litigation and Regulatory: - Any outstanding, threatened, or resolved litigation - Regulatory investigations or compliance orders - CRA audits or outstanding tax disputes - Any environmental assessments or orders

Legal due diligence is complementary to financial and operational review. Your accountant and financial advisor will lead the financial analysis, but the legal team needs to understand it to properly assess risk.

Key financial due diligence items that intersect with legal review:

• Review of the last three to five years of financial statements (audited if available, reviewed as a minimum)
• Accounts receivable aging — are there concentrations with a few customers? Is the AR collectible?
• Accounts payable and accrued liabilities — are all obligations properly reflected?
• Tax compliance: corporate income tax returns, HST filings, payroll remittances
• Any CRA reassessments, audits, or notices of objection
• Review of shareholder loans and related-party transactions
• Confirmation that all required government filings are current (WSIB, HST, corporate returns)

For businesses with physical operations, an operational review should assess the condition of key equipment, inventory quality and turnover, and the strength of key supplier relationships — all of which have legal implications for what representations the seller will need to make.

A business acquisition involves multiple agreements. Understanding which documents are needed and why is part of preparing for a smooth transaction.

Letter of Intent (LOI): A non-binding (mostly) document that sets out the key terms of the proposed transaction — price, structure, timeline, conditions, and exclusivity. The LOI frames the negotiation and becomes the foundation for the formal purchase agreement. Its binding provisions (confidentiality, exclusivity, no-shop) are critically important.

Asset or Share Purchase Agreement (APA/SPA): The main transaction document. It defines exactly what is being bought and sold, the purchase price and how it is paid, representations and warranties, covenants, closing conditions, and indemnification provisions. This is the most important document in the deal.

Non-Competition and Non-Solicitation Agreement: Standard in most acquisitions. The seller agrees not to compete with the business or solicit its customers or employees for a defined period.

Transition Services Agreement (TSA): If the seller is staying on for a period after closing to assist with transition, the TSA documents that arrangement — duties, duration, compensation, and liability.

Employment Agreements: If key employees are being retained, you want written employment agreements in place before or at closing to confirm their continued engagement on terms the buyer has reviewed and approved.

Escrow Agreement: If a portion of the purchase price is being held back in escrow to secure the seller's indemnification obligations, an escrow agreement governs the conditions for release of those funds.

Most business acquisitions involve some combination of buyer's equity, bank debt, and seller financing. Understanding how these structures interact is important from both a legal and commercial perspective.

Senior bank debt: A bank or credit union provides a term loan or operating line secured against the assets of the acquired business. The bank's lawyers will conduct their own due diligence and require security documentation (general security agreement, assignment of key contracts, etc.).

Vendor take-back (VTB) financing: The seller agrees to receive a portion of the purchase price over time — essentially lending money to the buyer to complete the deal. A VTB aligns the seller's incentives with the success of the business post-closing and makes the transaction more achievable. It is documented through a promissory note and potentially a security agreement.

SBA or BDC loans: For eligible buyers, the Business Development Bank of Canada and government programs can provide acquisition financing.

Earnouts: A portion of the purchase price is tied to the post-closing performance of the business. Earnouts can bridge valuation gaps between buyers and sellers but require careful legal drafting to avoid disputes about how performance is measured and what actions the buyer can take during the earnout period.

The deal does not end at closing. Both parties will have obligations that extend after the transaction completes.

For the buyer:

• Notifying customers, suppliers, and counterparties of the change in ownership
• Obtaining any required regulatory approvals or licenses (business licenses, professional permits, etc.)
• Updating bank accounts, credit facilities, and payment arrangements
• Completing any employee onboarding or transitional employment matters
• Registering any changes in the business name or corporation if applicable

For the seller:

• Providing transition assistance as agreed
• Remaining available to address any warranty claims within the limitation period
• Maintaining confidentiality about the business post-closing
• Complying with non-competition obligations

After advising on dozens of business acquisitions across the GTA, we have seen the same mistakes recur. Knowing them in advance is the best protection.

Skipping proper due diligence to move quickly: Competitive situations and impatient sellers create pressure to close fast. Deals that bypass proper legal and financial review routinely uncover problems post-closing that cost far more than the due diligence savings.

Not reading the commercial lease: The target business's lease may be its most important contract. Assignment restrictions, personal guarantee requirements, limited remaining term, and demolition clauses are all deal-relevant facts that must be understood before closing.

Assuming contracts will transfer automatically: In an asset deal, contracts must be individually assigned. Many contracts require counterparty consent to assign. Not confirming consent before closing can leave the buyer operating without valid contracts on day one.

Inadequate representations and warranties: Buyers who negotiate heavily on price but accept weak representations and warranties from the seller leave themselves exposed. Strong reps and warranties, backed by indemnification provisions, are how buyers protect themselves in share deals.

Neglecting employment law compliance: Employees of the business have rights under Ontario's Employment Standards Act. A business acquisition may trigger obligations around notice periods, severance, and continuation of employment. Getting employment law advice before closing prevents surprises.