Seller Take-Back Financing for a Small Business in Ontario

Some buyers cannot pay the full price at closing. A seller who agrees to be paid over time is acting like a lender, and that means taking on the risk that the buyer does not pay.

This article explains the general shape of seller take-back financing and what to settle in writing. It also covers the Ontario tax and employment rules that still apply to the sale, and why default planning belongs at the start.

What take-back financing is

In a take-back arrangement, the buyer pays part of the price at closing and owes the rest to you, usually under a promissory note with a payment schedule. How your rights as a creditor work while the balance is unpaid depends on the terms you negotiate and on your situation, so it is worth confirming with a lawyer.

The attraction is that it can help a deal close and spread out your income. The risk is that the business is now run by someone else, and its performance affects your repayment.

Terms to settle in writing

• The amount owed, the interest rate and the payment schedule.
• What security you will hold, such as a charge over the business assets, and how it will be registered.
• Whether the buyer's owners will personally guarantee the note.
• What counts as a default, whether there is a grace period, and what you can do about it.
• Whether the buyer may sell the business or assets before the note is paid.
• Whether you can speed up repayment if the buyer sells, refinances or misses payments.

How a security interest is registered and ranked against other lenders is a technical area. Ask your lawyer to handle it at closing, because mistakes are hard to fix later.

If the buyer defaults

Your options after a missed payment come mainly from the note, the security and any guarantee. They can include demanding payment, enforcing against the assets you hold security over, and claiming against a guarantor. Each step has requirements, and an unsecured creditor's options are narrower.

Act early. Keep a record of payments, send written notice in the form the documents require, and speak to a lawyer before taking any enforcement step. Delay can reduce your leverage.

Tax and employee rules still apply

• The GST/HST election under s. 167(1) applies to a sale of all or substantially all of the property needed to carry on the business or part of it.
• Without the election, or if less than substantially all the property is sold, the sale is treated as separate supplies of each property and service.
• If the buyer employs your employees, their service with you carries over for later calculations of length of employment, unless the buyer rehires them more than 13 weeks after the earlier of their last day with you or the day of the sale.
• Notice, termination pay and severance pay are then based on combined service with you and the buyer.

Employees the buyer does not hire within 13 weeks are your responsibility as the seller, so you must give ESA notice or pay in lieu, and severance pay where it applies. If you will stay on as an employee after the sale, a non-compete may be involved. The Employment Standards Act ban does not apply where a business or part of one run as a sole proprietorship or partnership is sold or leased, the seller becomes the buyer's employee immediately after, and the parties sign a non-compete as part of the sale. The Ministry reads this exception as working only where the seller is an individual or individuals, so it does not cover the sale of a corporation.

What to do next

• Decide how much of the price you can afford to have outstanding.
• Ask your accountant how the payment schedule affects your tax position.
• Have your lawyer prepare the note, security and any guarantees together with the purchase agreement.
• Look into the buyer's finances and experience before you agree.
• Diarize payment dates and follow up promptly on the first missed payment.

Frequently asked questions