Selling Your Ontario Business to Employees or a Management Team

Selling to a key employee or your management team can feel natural. They know the customers, the systems and the culture, and you may trust them more than an outside buyer. But a sale to insiders is still a full business sale, with a price, a structure, financing and a written agreement.

This article walks through the main pieces an Ontario owner should understand before agreeing on terms: how the deal is usually shaped, how staff service carries over, what happens to a non-compete, and the GST/HST election. It is general information, not advice on your particular deal.

How a sale to insiders is usually structured

In most insider deals the employees or managers form a new company to act as the buyer. That company then either buys the assets of your business (equipment, contracts, customer lists, goodwill) or buys your shares. Which route fits depends on your tax position, the contracts the business holds and what the buyers want to take on, so it is worth settling with an accountant and a lawyer early.

Be aware that the label on the deal does not control the legal result. A deal called an asset sale can still be a sale of a business for employment purposes if a business or part of one was in fact sold; indicators include a non-compete, use of the trade name and transfer of customer lists.

Price and financing

Employees rarely have the cash to pay a full price on closing. Common approaches include a bank loan to the new company, a portion of the price paid over time to you, or a mix. Each choice affects your risk. If you are paid over time, you will usually want security and clear default terms in writing.

• Agree how the price is set and who values the business, ideally with an independent accountant.
• Decide how much is paid on closing and how much later.
• Ask what security you will hold if part of the price is unpaid.
• Confirm whether you stay on, even briefly, to help with the handover.

What happens to the employees' service

If the buyer employs your staff after the sale, their employment is deemed not to have ended for Employment Standards Act purposes, and their time with you counts as time with the buyer. The employee gets credit for past employment for every right based on length of employment.

This cannot be avoided by offering new terms, running a selection process or having employees sign an acknowledgment that seniority is not carried forward. One exception is timing: prior service does not carry over if the employee is rehired by the purchaser more than 13 weeks after the earlier of their last day with you or the sale date. Vacation pay accrued and due before the sale stays with you, while vacation pay accrued but due after the sale passes to the buyer.

Non-competes in a sale to insiders

Since October 25, 2021, the Employment Standards Act prohibits employers from entering non-compete agreements with employees. There is an exception for a sale of business: it applies where a business run as a sole proprietorship or partnership is sold, the seller becomes the buyer's employee immediately after, and the parties sign a non-compete as part of the sale.

The Ministry reads that exception as working only where the seller is an individual, so it does not cover the sale of a corporation. A corporate seller's non-compete with the buyer is treated as a commercial covenant, while non-competes with the seller's employees remain barred unless an exception applies. Non-competes with an executive, such as a CEO, president or CFO, are not prohibited. Whether a particular non-compete is reasonable in length and area is a separate question to raise with a lawyer.

GST/HST on the sale

A joint election under section 167(1) of the Excise Tax Act is available only if the buyer acquires all or substantially all (generally 90% or more) of the property reasonably necessary to carry on the business or part of it. If the seller is a GST/HST registrant, the buyer must also be a registrant, and the election is made on Form GST44. With a valid election, no GST/HST is payable on the property and services supplied under the sale agreement, so none is collected at closing.

The registrant buyer must file Form GST44 by the due date of its GST/HST return for the first reporting period in which tax would otherwise have been payable. The election does not cover everything: tax still applies to taxable services you provide to the buyer, taxable leases and licences, and taxable sales of real property where the buyer is not a registrant.

What to do next

• Talk to your accountant about structure, price and tax before sharing terms.
• Have a lawyer prepare the purchase agreement, security and any non-compete.
• List employees, their start dates and accrued vacation.
• Confirm that the new buyer company is a GST/HST registrant if you are one.
• Decide whether you will stay on after closing, and on what terms.

Frequently asked questions