The undocumented loan that almost derailed a Meaford practice sale

The situation

Femke had already tried twice to close the sale of her engineering consulting practice before she called our office, and both attempts had ended the same disappointing way. Both times, the buyer's due diligence team had flagged the same issue on the company's books and walked the deal back to renegotiation, and both times Femke, working with her accountant alone and without a lawyer coordinating the response, had not been able to resolve it cleanly enough to actually get the second attempt across the finish line.

The practice was a mid-sized engineering consulting firm Femke had built and incorporated over roughly fifteen years, based in Meaford, valued in the low single-digit millions given its established client contracts and specialized technical staff. She was ready to retire from active practice after a long career and had found a buyer, Thalia, an architect looking to bring engineering services directly in-house alongside her own established design firm rather than continuing to subcontract that work out.

The recurring problem, the one that had derailed both earlier attempts, was a loan sitting on the company's books from Femke's aunt, Anastasia, who had advanced funds to the corporation years earlier during a genuinely slow stretch for the business. At the time, in the middle of that stressful period, nobody had drawn up a promissory note or set any formal repayment terms, because the family simply trusted each other and did not think of it as the kind of transaction that needed paperwork.

It sat in the company's financial statements as a shareholder loan payable, growing slightly year over year as small additional amounts moved back and forth informally between Femke and Anastasia without anyone tracking the movements as proper loan transactions with dates, amounts and purpose recorded consistently. Femke had known, in a general sense, that the loan existed, but she had never sat down to reconstruct exactly what it now amounted to or what it should properly be called on the company's books.

Thalia's due diligence team, on both prior attempts, could not tell from the existing records whether the loan was a real liability the company genuinely owed, a disguised equity contribution dressed up as debt, or something that should have been treated as income to Femke personally over the years it had been outstanding. Without documentation clarifying which of those it actually was, the company's financial statements could not be relied on cleanly by any careful buyer, and that lingering uncertainty alone was enough to stall the sale twice before Femke finally sought proper legal help to sort it out.

What the documents showed

Once we pulled the company's full financial history for review, the picture that emerged was more tangled than either of the two failed negotiation attempts had actually captured or understood. The loan from Anastasia had started as a single advance of a modest sum, but over the following years it had been added to twice more during subsequent slow periods, partially repaid once when the business had a strong quarter, and then increased again shortly after, all recorded inconsistently across different bookkeeping periods with no promissory note, no stated interest rate, and no fixed repayment schedule tying any of the individual entries together into one coherent obligation.

Some bookkeeping entries labeled the running amount a shareholder loan, even though Anastasia had never actually held any shares in the company at any point. Other entries treated portions of the same running balance as a vague related-party payable without specifying clearly to whom it was owed or under what terms it was meant to be repaid. This inconsistency raised a genuinely serious question for any careful buyer conducting real due diligence: if the corporation's own books could not say clearly and consistently what this liability actually was, what confidence could Thalia reasonably have in the rest of the financial statements she was relying on to value the entire business?

There was also an important tax dimension underneath the legal documentation problem. Funds moving between a corporation and a related individual without proper loan documentation, a stated interest rate and defined repayment terms can, depending on how they are ultimately characterized, raise legitimate questions about whether some or all of those amounts should have been reported as income rather than treated as a loan in the years they moved. We were careful not to give Femke tax advice ourselves on this point, since that sits outside what a lawyer should properly opine on, but we flagged the exposure clearly and recommended she bring her accountant in immediately to review the historical treatment before the deal moved any further, since an unresolved question here was exactly the kind of thing a buyer's own accountants would eventually find on their own if we did not address it first.

The underlying business itself, once you set the loan issue aside, was genuinely healthy and well-run. Femke's growing frustration through both failed attempts was that a single messy, relatively small line item kept overshadowing an otherwise strong company with real client relationships and solid margins, because nobody had gone back and properly reconstructed what that line item actually represented before trying to negotiate around it a second and then a third time.

What we did

1. Reconstructed the full transaction history of the loan from the company's financial records and underlying bank statements, tracing every individual advance, partial repayment and adjustment back to a specific date and amount, so the total outstanding balance could finally be stated with real confidence rather than estimated roughly as it had been in both of the prior failed attempts by Femke and her accountant working alone.
2. Coordinated closely with Femke's accountant to confirm how the historical amounts should properly be characterized for tax purposes going forward, since resolving the legal documentation on its own without also addressing the underlying tax treatment would have left a related but genuinely separate problem entirely unsolved and waiting to surface again later in the process, this time with Thalia's own accountants asking the questions.
3. Drafted a formal loan agreement retroactively documenting the actual terms on which Anastasia's various advances had genuinely been made over the years, including a clearly stated principal amount and a defined repayment structure, converting what had been an informal family arrangement into a clean, provable corporate liability that any buyer's diligence team could actually verify against bank records rather than take on faith.
4. Arranged for the loan to be repaid in full from the company's own funds ahead of closing, removing the related-party liability from the balance sheet entirely rather than asking Thalia to assume an ongoing obligation to a family member she had never even met and had no relationship with whatsoever, and rather than trying to negotiate a discount for a debt that was never actually hers to inherit.
5. Prepared a clean set of closing financial representations confirming plainly that the related-party loan was now fully settled and that no other undocumented shareholder or related-party balances remained anywhere on the company's books, giving Thalia's team something concrete and verifiable to actually rely on this time around instead of a promise resting only on Femke's own recollection of events years after they happened.
6. Responded quickly when Thalia's position shifted mid-negotiation, after her own lawyer raised a separate and previously unmentioned concern about historic intercompany billing between Femke's practice and a related sole proprietorship Femke had also operated years earlier, requiring us to open a second, narrower diligence review under real renewed time pressure with a nervous client watching the deal wobble for a third time.
7. Negotiated a revised representation and indemnity structure addressing this new intercompany billing question specifically and directly, satisfying Thalia's newly raised concern without needing to reopen the related-party loan issue that had already been fully resolved and documented weeks earlier, keeping the two problems from becoming entangled with each other again and dragging the whole negotiation backward toward where it had already stalled twice before.
8. Closed the share purchase once both the loan cleanup and the intercompany billing question were documented to both sides' genuine satisfaction, with final representations reflecting a company Thalia's team could now confidently value without the qualifications that had sunk the two earlier attempts entirely before we were ever retained to help Femke get this one properly across the line at last.
9. Debriefed Femke on what had gone differently this time, so she understood the closing was the product of resolving the underlying documentation gaps rather than simply getting a more agreeable buyer, which mattered for how she thought about winding down her remaining corporate affairs afterward and kept her personal and business finances properly separated and documented for whatever she took on next.

The outcome

The sale closed at a price broadly in line with what Femke had originally been seeking, once the practice's financial statements could finally be relied on without qualification or caveat. The related-party loan that had quietly sunk two prior negotiation attempts was fully repaid and properly documented before closing, removing it as a live issue entirely rather than papering over it with a vague promise to sort it out sometime after the deal closed.

Thalia's mid-negotiation shift, raising the separate intercompany billing question just as the deal seemed close to done, added several additional weeks to a process that had already run considerably long by that point, but it did not require reopening the loan cleanup work that had already been completed and documented. Having that piece already fully resolved meant the second, narrower round of diligence could focus tightly on the new concern instead of relitigating settled ground, which is ultimately what kept the deal from stalling out a third time the way the first two attempts had before.

Anastasia, once told plainly what the loan documentation process involved, was glad to have the arrangement formalized and repaid rather than left as an open-ended understanding between family members. Femke described the conversation with her aunt as easier than she had expected, since Anastasia had never intended the advances to become a source of complication years later.

Femke's own takeaway from the entire process was less about the specific legal mechanics involved and more about timing generally: the loan had been a genuinely manageable problem the whole way through, but leaving it undocumented for years had let it quietly grow into something that repeatedly derailed a sale she was otherwise well positioned to complete on favourable terms. Once the paperwork finally caught up to the actual reality of what had happened between her and her aunt over the years, the rest of the deal moved forward without further difficulty.

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