The Financing Condition in an Ontario Business Purchase Agreement

Very few buyers pay cash for a business out of a chequing account. Most need a bank loan, an investor, a vendor take-back, or some mix of all three — and none of that is usually locked in the day a purchase agreement gets signed. A financing condition is the clause that closes that gap: it makes the buyer's obligation to complete the purchase conditional on actually obtaining financing on acceptable terms, by an agreed date.

Without it, a buyer who signs, then can't get approved, may be stuck — either forced to close with money they don't have, or in breach of the agreement if they can't. This article looks at what a well-drafted financing condition actually contains, from the buyer's side of the table.

Why This Clause Matters to a Buyer

A signed purchase agreement is a binding contract. If your obligation to close isn't made conditional on financing, "I couldn't get the loan" is not, on its own, an excuse a court will treat as an automatic exit. The financing condition converts financing from a hoped-for outcome into a defined contractual gate: if the gate isn't cleared by the deadline, you're generally entitled to walk away without being in breach — provided you did what the clause required of you along the way.

It also solves a practical timing problem. Lenders often want to see a signed agreement before finalizing a loan, but buyers understandably don't want to sign an unconditional agreement before they know financing is available. A financing condition lets both things happen in the right order.

Elements of a Well-Drafted Financing Condition

A financing condition that actually protects a buyer usually addresses each of the following:

1. A defined amount. The clause should state the amount of financing the buyer needs to obtain — tied to the purchase price and any amount being funded from the buyer's own resources or a vendor take-back.
2. A description of "acceptable" financing. Vague language ("financing satisfactory to the buyer") gives the buyer more flexibility but can also make a seller nervous about the condition being used as a pretext to walk. More specific language (a defined lender type, a general description of acceptable terms) gives the seller more certainty but leaves the buyer less room if the market shifts.
3. A deadline. An open-ended financing condition is rarely acceptable to a seller. The clause should set a specific date by which financing must be obtained or the condition waived.
4. An effort standard. Most agreements require the buyer to use "commercially reasonable" or "best" efforts to obtain financing — meaning you can't simply decline to apply and then claim the condition wasn't met.
5. Notice and waiver mechanics. The clause should say how and when the buyer confirms the condition is satisfied, waived, or has failed, and what happens to the agreement in each case.
6. Deposit treatment. What happens to any deposit if the condition genuinely isn't satisfied should be spelled out — ideally returned to the buyer if the required effort was made in good faith.

A Buyer's Practical Checklist

Before you sign a purchase agreement with a financing condition, it helps to have already:

• [ ] Had a preliminary conversation with a lender or broker about the deal, even before formal application
• [ ] A realistic sense of what down payment or equity contribution you can bring
• [ ] Identified whether any part of the price will be financed by the seller (a vendor take-back) and how that affects the amount you still need to borrow
• [ ] Discussed with your lawyer what "acceptable financing terms" should mean in your specific clause
• [ ] Confirmed the financing deadline gives you realistic time to complete a lender's underwriting process

What a Poorly Drafted Clause Looks Like

• No deadline, leaving the deal open-ended and the seller (understandably) unwilling to sign
• No effort standard, so it's unclear whether the buyer has to actually try
• No definition of "acceptable" terms, inviting a dispute later about whether a real offer should have been accepted
• Silence on the deposit, leaving both sides guessing what happens if financing falls through

Sellers will often negotiate back against a buyer-friendly draft, and that negotiation is normal — the point of a written clause is to remove the ambiguity, not to guarantee the buyer never has to compromise.

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