Buying a Business in Vaughan: Who Inherits the Staff's Severance?

The situation

Dawit had run a small licensed childcare business in Vaughan for about twelve years through his own corporation. He was ready to retire and had a buyer lined up: Biniam and Natalia, a couple who wanted to leave their current jobs and run the business themselves. Biniam worked as a grocery clerk and Natalia worked as an early childhood educator at another centre. Between savings and a small loan, they had put together roughly $185,000 to buy the business as a going concern — the licence, the client relationships, the equipment, and the goodwill Dawit had built.

The deal was structured as an asset purchase, not a share purchase. In an asset purchase, the buyer acquires specific assets and takes on only the liabilities it agrees to assume, rather than stepping into the seller's corporation with all of its history attached. Biniam and Natalia had been told, informally, that this structure meant they were buying a clean slate — no inherited debts, no inherited disputes, no inherited risk. They came to Treadstone Law to have the purchase agreement reviewed before they signed, and to make sure that understanding was correct.

What the review found

The asset-versus-share distinction is real, and it matters for most liabilities: unpaid taxes, pending lawsuits, supplier debts and the like generally stay with the seller's corporation in an asset deal. But one category of liability does not respect that line as cleanly as most buyers assume — employees.

Biniam and Natalia's plan was to keep on the two staff members currently working at the centre, because continuity mattered to the families whose children attended. One of those employees had worked there for about nine years; the other for just under two. Under the Employment Standards Act, 2000, when a business is sold and the new owner hires an employee of the seller to do substantially the same work, without a meaningful gap in employment, that employee's service is deemed continuous. In plain terms: the employee's nine years with Dawit's corporation do not disappear just because the paycheque now comes from Biniam and Natalia. If that employee were ever let go down the road, the severance and termination entitlements owed would be calculated on the full run of service — the years worked for Dawit plus every year worked for the new owners.

That is a real cost that does not show up on a balance sheet and does not appear in a typical asset list. Dawit's corporation, as the seller, would have no further exposure once the sale closed and the employees kept working without interruption — the obligation simply transfers forward, quietly, to whoever hires the employee next. Biniam and Natalia had priced the business based on its equipment, its licence, its client roster and its goodwill. Nobody had priced in the fact that they were also agreeing to shoulder nine years of one employee's accrued tenure the moment they signed her a new offer letter.

This is a common and understandable blind spot. Buyers focus on what they are getting — the assets — and overlook what continuing an employment relationship actually carries with it. The purchase agreement Dawit's side had drafted was silent on the point entirely. It said nothing about who would bear the cost if a kept-on employee's long-service severance ever became payable.

What we did

1. Reviewed the staff list and length of service. Before advising on the agreement, we asked for the payroll records for both employees Biniam and Natalia intended to keep — start dates, current wages, and any prior notice of termination Dawit had ever given and rescinded. This confirmed the nine-year and roughly twenty-month tenures and gave a basis for estimating what future termination or severance pay on each could realistically cost.
2. Explained the two ways to avoid inheriting the exposure — and why neither fit here. Dawit could have terminated both employees before closing and paid their statutory termination pay himself, letting Biniam and Natalia hire them fresh with no carried-over service. Or the employees could simply not be kept on at all. Both options solved the legal problem but defeated the reason Biniam and Natalia wanted continuity in the first place, and risked losing staff the families relied on.
3. Negotiated a specific allocation of the risk instead of trying to eliminate it. We proposed language making clear that Biniam and Natalia would hire both employees on continuous service, but that Dawit's corporation would indemnify — that is, reimburse — the buyers for the portion of any future severance or termination pay attributable to service performed before closing, if either employee were ever let go.
4. Built in a holdback to make the indemnity mean something. A promise to reimburse is only as good as the seller's ability to pay it years later, once the corporation may have been wound up. We negotiated an escrow holdback of roughly $15,000 out of the purchase price, held by a third party for an agreed period after closing, specifically earmarked to cover this exposure if it ever crystallized.
5. Put the estimated cost in writing for the clients. We gave Biniam and Natalia a plain breakdown of what each employee's severance exposure would look like today versus in five or ten years if their tenure kept accruing, so they understood exactly what they were pricing in and why the holdback figure was reasonable rather than arbitrary.

The outcome

The purchase closed with the indemnity and holdback clauses in place. Both employees moved across to Biniam and Natalia without any gap or change to their roles, which was exactly the continuity the buyers had wanted for the families they served. Nobody lost a job, and nothing about day-to-day operations changed on the surface.

What changed was who carried the risk of what had already accrued. If either employee is ever terminated in the future, Biniam and Natalia now have a contractual right to recover the pre-closing share of the severance cost from Dawit's corporation, backed for the near term by the escrow holdback rather than a bare promise. No dispute has arisen — the point of catching this during due diligence was that it never needed to. Dawit's corporation was wound down in an orderly way after closing, with the escrow release date and process agreed in advance rather than left to be negotiated under pressure later.

The roughly $185,000 purchase price effectively became $170,000 paid at closing plus $15,000 held back against a liability that most buyers in this position never learn about until an employee is actually let go. Because it was identified and priced during the purchase process instead of discovered afterward, it cost Biniam and Natalia a clause in the agreement and a modest holdback — not a surprise bill years into owning the business.

What you can learn from this