Can I Back Out of a Deal to Buy a Business in Ontario?

You have signed, or nearly signed, a deal to buy a business, and now you are having doubts. Maybe the numbers look different after a closer look, or something turned up in your investigation. You want to know if you can leave and what it might cost you.

The answer depends heavily on the wording of your agreement and on the type of business. This article explains the main factors, the legal protections that do exist for franchise buyers, and the checks that can turn doubts into solid reasons.

Start with the agreement you signed

For an ordinary business purchase, deposits, conditions and termination rights depend on the contract and on the general law of contracts. Ontario does not give buyers a general right to cancel just because they have changed their mind. The main statutory cancellation rights are for franchises, covered below.

Read the agreement for these items before you decide anything:

• Conditions to closing, such as satisfactory due diligence, financing, landlord consent or required certificates.
• Who can waive each condition, and by what date.
• What happens to your deposit if the deal does not close, and why.
• Any termination clause, and the notice it requires.
• Whether you are buying assets or shares, since that changes what you take on.

If you have signed an agreement with no conditions, backing out could expose you to a claim by the seller. Speak to a lawyer before you tell the seller anything.

Conditions to closing and your deposit

A condition is a requirement that must be met before you have to close. If a condition in your favour is not met, the agreement may let you end the deal and recover your deposit. If there is no such condition, walking away may put the deposit at risk. Whether you get it back turns on the exact words and the facts, so have a lawyer review them.

Conditions work best when they are specific and tied to something you can check. Examples include a clean lien search, the landlord's consent to assign the lease, and a WSIB purchase certificate. Each is discussed below.

Also watch the deadlines. Many conditions must be waived or satisfied by a set date, and missing it can change your position.

Due diligence results that can matter

Bad due diligence results are often the real reason a buyer wants out. These checks are common, and each can support a condition in the agreement.

A PPSR search matters because a buyer of a business's assets outside the ordinary course of business does not get the protection that applies to ordinary-course purchases of goods. A WSIB certificate matters because, without a valid one, the WSIB may hold the buyer liable for all amounts the seller owed up to the date of sale.

Ontario's Bulk Sales Act was repealed on March 22, 2017, so buyers no longer have to follow bulk sales procedures. Older material that says otherwise is out of date. A sale in bulk by a seller who holds, or must hold, a vendor permit under the Retail Sales Tax Act is a separate case, and a buyer who does not get the duplicate certificate from the seller is responsible for the seller's unpaid taxes, penalties and interest.

If you are buying a franchise

Franchise buyers have statutory protections. A franchisor must give you a disclosure document at least 14 days before the earlier of signing any franchise agreement or paying any consideration. If it comes late, or does not meet the requirements, you may rescind (cancel) the agreement without penalty or obligation no later than 60 days after receiving the disclosure document.

If you never received a disclosure document, you may rescind no later than two years after entering into the franchise agreement. A notice of rescission must be in writing and delivered to the franchisor personally, by registered mail, by fax, or by another prescribed method.

After rescission, the franchisor or its associate has 60 days from the effective date to refund money received (other than money for inventory, supplies or equipment), buy back inventory, supplies and equipment at the purchase price, and compensate you for certain losses. You can also sue for damages if you suffered a loss from a misrepresentation in the disclosure document. That claim can fail if the other side proves you bought knowing of the misrepresentation. A waiver of your rights under the Act is void.

What to do next

• Gather the signed agreement, schedules, deposit receipt and any amendments.
• Note every condition and its deadline.
• Do not send a message ending the deal until you have had advice.
• Run or order the searches that are still outstanding.
• Keep a written record of what you found and when.
• Ask a lawyer whether a condition has failed or whether you have a franchise right to rescind.

Timing often decides your options, so act promptly.

Frequently asked questions