How Warranty Survival Periods Saved a Milton Business Deal

The situation

Kajan trained as a hairdresser and opened a single chair in a strip plaza more than a decade ago. Senthil, an early childhood educator by background, joined a few years later to run the children's programming side of what had grown into a small group of personal-care and family-services locations across the region. By the time they came to Treadstone Law, they were no longer just operators — they were buyers. A competitor with three locations, including one directly in their target growth corridor, had quietly gone up for sale, and Kajan and Senthil wanted it.

The deal was structured as a share purchase: Kajan and Senthil's holding company would buy all the shares of the target's numbered company from its owner, represented through the process by a contact named Bilal. The agreed purchase price was roughly $11 million, reflecting the target's revenue, its lease positions, and its trained staff. For a business of that size, the purchase agreement itself — not the price — was where most of the real risk would be decided.

What due diligence found

In a share purchase, the buyer takes over the corporation exactly as it stands, including liabilities the buyer may not know about. Representations and warranties are the seller's contractual promises about the state of the business — that its financial statements are accurate, that it has no undisclosed debts, that its employees are properly classified, that its tax filings are current, and dozens of similar statements. If a representation turns out to be false, the buyer can claim against the seller for the resulting loss. That claim right is called an indemnity.

Two things limit how useful an indemnity actually is. The survival period is how long after closing the buyer can still bring a claim for a breach — after it expires, even a true breach is not recoverable. The cap is the maximum amount the seller has to pay out, usually a percentage of the purchase price. The first draft of the purchase agreement, prepared by the seller's side, proposed a fairly standard structure: general representations survived for twelve months after closing, and the total indemnity cap sat at about 5% of the purchase price, or roughly $550,000.

During due diligence, our team's review of the target's employment records raised a flag. A meaningful portion of the target's instructors and support staff were engaged as independent contractors rather than employees, despite working set hours, using the company's equipment, and reporting to a manager in the way an employee typically would. Under Ontario's Employment Standards Act, 2000, how a working relationship is labelled on paper does not control how it is treated in law — a person doing employee-like work can be found to be an employee regardless of the contract they signed, and that finding can trigger retroactive obligations for vacation pay, overtime, and statutory entitlements the company never budgeted for. If regulators or the workers themselves challenged the classification after closing, that liability would land on Kajan and Senthil's company as the new owner, not on the seller who created it.

The risk was real but not quantifiable with precision at the diligence stage — it depended on how a review would ultimately characterize the roles, and over how many years back pay might be owed. A twelve-month survival period was a poor match for that kind of risk: classification disputes often surface only when a worker leaves, files a complaint, or a payroll audit happens, none of which reliably happens within a year.

What we did

1. Separated the employment representation from the general pool. Rather than trying to extend the survival period for every representation in the agreement — which the seller's side resisted as overreaching — we proposed carving out the employee classification representation as its own item with its own survival period and its own dedicated remedy, leaving the general twelve-month structure in place for lower-risk items like general corporate matters.
2. Negotiated a longer survival period tied to the actual risk window. We proposed thirty months for the classification representation specifically, reasoning that a misclassification issue would most plausibly surface through a complaint, an audit, or a departing worker within that window, and that Ontario's general limitation period for civil claims is two years from discovery under the Limitations Act, 2002 — a two-and-a-half-year survival period gave the buyers realistic room to discover and act on a problem before their claim right expired.
3. Set up a dedicated holdback instead of relying on the general cap. Rather than leaving classification risk to compete against every other possible claim for a share of the $550,000 general cap, we negotiated a separate holdback of roughly $300,000, withheld from the purchase price and held in escrow for the extended survival period, available specifically to cover classification-related claims.
4. Required interim conversion of the highest-risk roles. As a closing condition, we required the seller to convert the clearest cases of misclassified staff to proper employee status before closing, reducing the pool of exposure the buyers would inherit rather than simply pricing around it.
5. Kept the general cap and period standard elsewhere. We did not push to extend survival periods across the whole agreement. Overreaching on lower-risk items would have slowed the negotiation and given the seller's side leverage to push back on the one term that actually mattered. Concentrating effort on the specific, diligence-identified risk kept the rest of the deal moving on a normal timeline.

The outcome

The deal closed roughly ten weeks after the classification issue was first flagged, on schedule with the buyers' original target date. The final agreement carried the standard twelve-month, roughly $550,000 general indemnity structure for ordinary representations, plus the separate thirty-month, roughly $300,000 escrowed holdback tied specifically to employee classification.

As a closing condition, the seller converted the clearest misclassified roles to employee status before the deal closed. About a year into the survival period, as part of the payroll compliance check Treadstone had recommended Kajan and Senthil build into their integration plan, a second review turned up one more contractor role whose responsibilities made the classification hard to defend. Because the classification representation was still well inside its extended survival period, the buyers converted the role to employee status and paid the retroactive vacation pay and overtime owed directly from the escrowed holdback — before the worker herself ever raised it or a regulator got involved.

Had the agreement kept the original twelve-month, single-pool structure, the extended survival period would not have existed by the time the second review happened, and there would have been no dedicated fund to draw on — the conversion and back pay would have come out of the buyers' own pocket, discovered later and on worse terms. Catching the remaining risk on the buyers' own schedule, rather than a worker's or a regulator's, and paying for it from money the seller had already set aside, turned what could have become a contested claim into a routine correction.

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