- Whether you can walk away depends on what you signed and the conditions written into it, not on how you feel about the deal.
- Conditions such as financing or due diligence are the usual ways out, and they only work if you follow their wording and timing.
- Deal points like the GST election affect the tax on the deal, and CSBFP financing does not cover share purchases.
You signed an offer or purchase agreement for an Alberta business, and now you are having doubts. Maybe the numbers look different on a second read, the financing is uncertain, or something turned up in your review. Many buyers find themselves here.
There is no single answer. Your options depend on the document you signed, the conditions in it and the deadlines attached to them. This article explains how to think through the question and what to do before you act.
This article covers the law of Alberta.
First, what did you actually sign?
Business deals often move through stages: a non-binding letter of intent, then a binding offer or a full purchase agreement. Some documents are mostly an agreement to keep talking. Others are fully binding contracts with a closing date.
Look for words like subject to, conditional on, binding or non-binding. Check whether there is a deposit, an exclusivity period and a date by which conditions must be satisfied or waived. Because wording drives the result, have a lawyer read the document before you tell the seller anything.
Conditions that may give you a way out
A condition is a requirement that must be met before you are obliged to close. If it is not met, the agreement usually allows you to end the deal. Common examples include:
- Financing: you obtain a loan on acceptable terms.
- Due diligence: you review the financial records, contracts, leases and other documents and are satisfied with them.
- Searches: registry searches show no surprises, such as unexpected registered interests against the business.
- Third-party consents: a landlord or key supplier agrees to the change.
- Tax matters: the parties complete the paperwork the deal depends on.
These only help if you follow them. Read each condition's wording and deadline closely, and do not assume you can raise a concern after the deadline has passed. How a missed date is treated depends on the agreement, so it is worth confirming with a lawyer.
Deal points that can affect closing
Some issues are built into the structure of the deal. The GST rule for business sales applies where the buyer gets all or substantially all of the property that can reasonably be regarded as necessary to carry on the business. In that kind of sale, the going-concern exemption works through a joint election by the supplier and the recipient, and if it is valid no tax is payable on the supplies under the agreement. Even with a valid election, tax is still payable on a taxable service the supplier will render, on a taxable lease, licence or similar supply of property, and, where the buyer is not a registrant, on a taxable sale of real property.
The election is not available where the supplier is a registrant and the recipient is not. If the buyer is a registrant, it must file the election with the Minister by the filing deadline for its first reporting period in which tax would otherwise have become payable, although the Minister may accept a later date on the buyer's application. Without an election, GST at 5% in Alberta can apply to the taxable parts of the sale.
Financing can also be a sticking point. If you planned to use the Canada Small Business Financing Program, it does not finance share purchases. Financing is capped at the lower of the purchase price or the appraised value of the eligible assets. If your plan does not fit these rules, raise it with your lawyer early and check how your financing condition is worded.
If there is no condition to rely on
If you simply change your mind and no condition applies, walking away may be a breach of the agreement. What the seller can do in that case depends on the wording of the agreement, including any deposit terms, so it is worth confirming your position with a lawyer before you act. How much exposure you face depends on the wording, the deposit terms and the facts.
Negotiation is often realistic. A seller may prefer an agreed termination, a price adjustment or an extension over a dispute. Put any agreement in writing and signed by both sides.
What to do next
- Find your signed documents and any amendments.
- List every condition, who it benefits and its deadline.
- Do not tell the seller you are backing out until you know your position.
- Gather the reasons for your concerns, such as financing refusals or diligence findings.
- Give any required notice in the form and by the date the agreement sets.
- Speak with a lawyer promptly, since deadlines may be short.
Frequently asked questions
Can I back out if I have a deposit down?
It depends on the agreement. If a condition has not been met, you may be able to end the deal under its terms. If not, the agreement may say what happens to the deposit, so read that clause carefully.
Is a letter of intent binding?
Some are mostly non-binding, while others have binding parts such as confidentiality or exclusivity. The wording decides, so have it reviewed before you rely on either view.
What if my financing falls through?
Check whether your agreement has a financing condition and whether its deadline has passed. Note that CSBFP does not finance share purchases, so the structure of the deal matters.
Does the GST election affect whether I can close?
It affects the tax on the deal. The election is not available where the supplier is a registrant and the recipient is not. A registrant buyer must file it by the filing deadline for its first reporting period in which tax would otherwise be payable, though the Minister may accept a later date on the buyer's application.
Sources
- Excise Tax Act, s.167 (Justice Laws) — Justice Laws (federal)
- ISED – CSBFP FAQ for small businesses — ised-isde.canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
This is a buying & selling a business question
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