Can a Buyer Back Out of a Business Purchase in Ontario?

A deal can look settled and then fall apart. A buyer may find problems during due diligence, financing may fall through, or a seller may change their mind. Both sides then ask the same thing: can the deal legally be ended, and who loses what?

This article explains the general ideas of conditions and deposits in plain terms, covers the statutory exit available to franchise buyers in Ontario, and lists issues that often come up during due diligence.

Start with the written agreement

Whether a buyer can back out is largely a question of what the purchase agreement says. A condition is a requirement that must be met, or waived by the party it protects, before the deal has to close. Common examples are satisfactory due diligence, financing, and consents from landlords or other third parties.

If a condition is not met in the way the agreement describes, the party it protects may have a right to end the deal. If there is no such condition, walking away may be a breach. The wording, the deadlines and the notice steps all matter, so read them closely before acting.

Deposits and failed closings

A deposit is money paid up front to show the buyer is serious. What happens to it if the deal fails depends on the agreement and on why the deal failed. It may be returned if a condition was not satisfied, or kept by the seller if the buyer defaults. Remedies for a failed closing can also include a claim for damages, and the specific outcomes depend on the facts, so get legal advice before you either demand or release a deposit.

Franchise purchases have statutory exits

If you are buying a franchise, the Arthur Wishart Act (Franchise Disclosure), 2000 requires the franchisor to give a disclosure document at least 14 days before you sign the franchise agreement or any related agreement, or pay any consideration. The franchisor must also disclose any material change before signing or payment.

• You can cancel without penalty within 60 days of receiving the disclosure document or a material change statement if it is late or deficient.
• If no disclosure document was ever provided, you can rescind within two years of entering the franchise agreement.
• After a valid rescission the franchisor has 60 days to return your money, and you can also sue for damages for loss from incomplete information or misrepresentation.

A disclosure document missing the signed and dated certificate required by section 7 of O. Reg. 581/00 is a fatal defect on its own, and the franchisees do not need to show they could not make an informed decision. The government does not review or approve franchisors or their disclosure documents, so reviewing the document yourself, with a lawyer, matters.

Issues that surface in due diligence

• Employees: when a business or part of a business is sold and the purchaser employs a seller's employee, prior service carries over, and notice, termination pay and severance pay are based on combined service. It does not carry over if the purchaser rehires the employee more than 13 weeks after the earlier of the last day with the seller or the day of the sale.
• Employees are not forced to move: the purchaser need not hire them and they need not accept.
• Tax: the GST/HST election is only available where the buyer acquires all or substantially all of the property needed to carry on the business or part of it.
• Non-competes: the ESA sale exception works only where the seller is an individual or individuals, so it does not cover the sale of a corporation.

A problem in any of these areas may justify renegotiating the price or terms, or invoking a condition. Whether it allows a buyer to end the deal depends on the agreement.

What to do next

• Find the conditions clause and note every deadline and the way notice must be given.
• Check where the deposit is held and what the agreement says about its return.
• Put concerns in writing promptly rather than simply going quiet.
• If this is a franchise, check the date you received the disclosure document and whether it was complete and certified.
• Talk to a lawyer before you either terminate the deal or refuse to close.

Frequently asked questions