The Business Purchase Agreement in Ontario: What Every Buyer and Seller Needs to Know

Once due diligence is done and the parties are ready to commit, the deal is memorialized in a business purchase agreement — either an asset purchase agreement (APA) or a share purchase agreement (SPA). This is the binding contract that governs what is being bought, for how much, and what happens if something goes wrong. For many business owners, the purchase agreement is the longest and most complex contract they will ever sign. This article demystifies its core components so you know what you are looking at — and what to push back on.

The Anatomy of a Business Purchase Agreement

Recitals and definitions

Every purchase agreement opens with recitals (a brief "whereas" narrative) and a definitions section. The definitions section matters more than most people realize: terms like "Business," "Assets," "Assumed Liabilities," and "Closing Date" will be used throughout the document, and their precise scope shapes the entire deal. Read the definitions carefully.

Purchase price and adjustments

This clause states the total consideration and how it is structured — cash, vendor financing, earn-out, shares, or a combination. It also sets out any purchase price adjustment mechanism.

Working capital adjustments are common in larger deals. The parties agree on a target working capital level (current assets minus current liabilities) as of closing. If the actual working capital at closing is higher or lower than the target, the price adjusts accordingly. This protects the buyer from the seller stripping cash out of the business in the days before closing.

Representations and warranties

Representations and warranties (often just called "reps and warranties") are statements of fact that each party makes to the other as of the closing date. For the seller, these typically cover:

• The corporation is validly incorporated and in good standing.
• The shares or assets are owned free and clear of any encumbrances.
• The financial statements are accurate and prepared in accordance with generally accepted accounting principles.
• There are no undisclosed lawsuits, tax audits, or regulatory investigations.
• Material contracts are valid and no counterparty is in default.
• All employees have been disclosed and all statutory obligations are current.

The buyer also gives reps and warranties, typically about its capacity to enter the deal and its financing.

Why reps and warranties matter: If a rep and warranty turns out to be false after closing, the buyer has a legal remedy against the seller. This is the primary risk-allocation mechanism in a purchase agreement.

Indemnification

The indemnification clause sets out what happens when a rep and warranty is breached. Typically, the seller agrees to indemnify (compensate) the buyer for losses that arise from a breach.

Key indemnification provisions to watch:

• Basket/deductible: The buyer must absorb the first dollar amount of losses before the seller becomes liable. This prevents small claims.
• Cap: The seller's maximum liability is capped — often at the purchase price or a percentage of it. Sellers want a low cap; buyers want a high one.
• Survival period: Reps and warranties expire after a set period (commonly one to two years post-closing). Claims must be made within that window.
• Fundamental reps: Some representations — like the seller actually owning the shares being sold — survive indefinitely or for a longer period.

Conditions to closing

A condition is something that must be satisfied (or waived) before either party is obligated to complete the transaction. Typical conditions include:

• Buyer's satisfactory completion of due diligence (for asset purchases, often satisfied before signing the main agreement).
• Seller obtaining third-party consents (landlord, key contract counterparties).
• Buyer securing financing.
• No material adverse change in the business between signing and closing.
• Government or regulatory approvals, if any are required.

Each condition should specify who must satisfy it and when. If a condition is not met, the party in whose favour the condition runs can either waive it (proceed anyway) or terminate the agreement.

Covenants

Covenants are promises to do or not do something. Common seller covenants between signing and closing:

• Operate the business in the ordinary course.
• Not take on new debt or make unusual payments.
• Maintain insurance.
• Not solicit or enter into negotiations with other potential buyers.

Closing mechanics

The closing section describes what happens on closing day:

• What documents are exchanged (share certificates, officer's certificates, consents, transition service agreements).
• What funds are transferred and how (typically by wire or certified cheque).
• The sequence of deliveries.
• The time and location of closing (most Ontario business closings now happen electronically via document exchange and e-transfers or wire transfers).

Post-closing obligations

After the keys are handed over, some obligations continue. Common post-closing provisions:

• Transition assistance: The seller agrees to help introduce customers, explain systems, or support the buyer for a defined period.
• Non-competition and non-solicitation clauses: The seller agrees not to compete or poach customers or employees for a period of time. These are discussed in detail in a separate article.
• Escrow holdback: A portion of the purchase price is held in trust by a lawyer for a set period to cover potential indemnity claims.

Frequently asked questions