The Franchise Resale That Came With Someone Else's Tax Debt

The situation

Paulo called on a Tuesday morning, and it took him a few minutes to get to the actual reason. He and his husband Piotr had bought a franchise resale in Listowel about six weeks earlier, a service business in the seven-figure range that Wojciech, the previous owner, had built up over a decade before deciding to retire. Paulo worked as an IT support lead and Piotr as a welder, and buying the franchise had been years in the planning, a way to build something together outside their day jobs and eventually replace both incomes.

They had handled the purchase largely on their own, using a template agreement recommended by the franchisor and negotiating directly with Wojciech, who they described as straightforward and cooperative throughout. A modest holdback, a small fraction of the purchase price, had been built into the deal to cover any unexpected liabilities that surfaced after closing. At the time, that had felt like more than enough caution for a business with clean-looking books and a seller who seemed to have nothing to hide.

The letter that prompted Paulo's call was from the tax authority, addressed to the business under its new ownership, referencing an amount of unremitted HST from before the sale that the letter suggested the new owner could be held responsible for collecting. Paulo had never heard the term 'successor liability' before that morning. He assumed, reasonably, that a tax debt from before he owned the business was the previous owner's problem, not his.

By the end of the call, it was clear the situation was more serious than a confusing letter. The unremitted amount referenced was large enough that the holdback Paulo and Piotr had negotiated, without legal advice, would not come close to covering it. They had tried, on their own, to reach Wojciech about it, and gotten an answer that amounted to a shrug, along with a suggestion that the letter was probably a mistake and would sort itself out. That was when they decided to bring in a lawyer, later than either of them wished they had, and later than either of them would have waited had they known at closing what a term like successor liability could eventually mean for two people who had never dealt with the tax authority beyond filing their own personal returns each spring.

Where it went wrong

The core problem traced back to how the purchase had been structured. Paulo and Piotr had bought the business as an asset purchase rather than acquiring shares, which is generally the safer route for a buyer, and on a purchase at arm's length and at fair market value, that route would have kept them clear of Wojciech's tax history entirely. The trouble was that the template agreement, put together without anyone pricing the assets carefully, valued a portion of the equipment and inventory well below what it was actually worth. That gap between price and value was enough to expose Paulo and Piotr to a share of Wojciech's unremitted HST: the tax authority can reach a buyer who did not pay fair value for what it received, but only up to the shortfall between the two figures, not the full amount Wojciech owed.

Wojciech's books had shown the business as current on its filings, and nothing in the financial statements Paulo and Piotr reviewed suggested otherwise. What had not been reviewed carefully enough was the gap between what the business had collected in HST from customers and what had actually been remitted to the tax authority over the final eighteen months before the sale. That gap had grown quietly, and nobody on the buying side had asked the pointed questions that might have surfaced it before closing.

The holdback itself compounded the problem. It had been set as a flat, modest figure, chosen more as a gesture of caution than as a calculated cushion against a specific category of risk. Nobody had connected the holdback amount to the actual exposure that pricing some of the assets below fair market value could create, because nobody involved in negotiating the deal had flagged that exposure as a possibility in the first place.

By the time Paulo called, Wojciech had already received and largely spent the purchase price beyond the holdback, and his willingness to cooperate had cooled considerably once he understood what a full accounting might reveal. The absence of legal advice at the negotiation stage had left Paulo and Piotr without either a purchase agreement that priced every asset at its real value or a holdback sized to absorb the shortfall if something had been missed anyway.

What we did

1. Confirmed the scope of the exposure directly with the tax authority. Rather than relying on the letter alone, which gave only a partial picture, we contacted the tax authority to establish precisely what amount was being attributed to successor liability and on what basis. Getting an accurate, documented figure first was essential, because any negotiation with Wojciech built on an estimate rather than a confirmed number would have invited exactly the kind of dispute over amounts that we needed to avoid.
2. Reviewed the purchase agreement for every available lever. We examined the holdback clause, the representations Wojciech had made about the business being current on its filings, and any indemnity language, however thin, to identify what contractual claims Paulo and Piotr actually had against him beyond the holdback amount itself. A template agreement negotiated without legal advice often contains more useful language than the parties realize, and finding it here meant the claim did not have to rest on the holdback alone.
3. Obtained an independent valuation of the underpriced assets. Because the exposure turned on the gap between what those assets were worth and what the purchase agreement said Paulo and Piotr had paid for them, we retained a valuator to establish, on the record, what fair market value actually was at the time of sale. Doing this after closing could not undo the exposure that gap had already created, but it sharpened the case against Wojciech by converting an estimate into a figure neither side could credibly dispute.
4. Quantified the true amount owed versus what the holdback could cover. Once the valuation confirmed the shortfall, we set it against the modest holdback to show precisely how large the gap was. That comparison became the central number in every conversation that followed with Wojciech's advisors, because it converted a vague sense of unfairness into a specific dollar gap that had to be addressed directly rather than argued around.
5. Sent formal notice to Wojciech asserting breach of his representations. Because the agreement included a statement that the business was current on its tax filings, and that statement was false, we had a basis to claim against Wojciech personally for the amount beyond the holdback, not just to draw down the holdback itself. This mattered because the holdback alone would never have covered the full shortfall, and without a separate claim, Paulo and Piotr would have had no way to reach the remainder.
6. Negotiated a payment plan directly with Wojciech. Given that much of the purchase price was already spent, we worked out a structured arrangement for Wojciech to pay the shortfall over time rather than insisting on an immediate lump sum he could not produce. A realistic payment plan, tied to a documented breach, gave Wojciech a reason to cooperate rather than dig in, which made the recovery achievable instead of theoretical.
7. Helped Paulo and Piotr manage the tax authority relationship going forward. We coordinated the business's response to the tax authority so that payments toward the historical shortfall were properly credited and the business's ongoing standing was protected while the underlying dispute with Wojciech was resolved. Keeping this administrative thread separate from the dispute with Wojciech meant the business's day-to-day standing was never put at risk by a fight that, in substance, belonged between Paulo, Piotr, and their seller.

The outcome

The full holdback was applied against the shortfall, and Wojciech agreed, under the pressure of a documented breach of his representations, to a structured payment plan covering most of the remaining gap over the following year. A smaller residual amount, in the low tens of thousands, was ultimately absorbed by Paulo and Piotr, since a portion of the historical shortfall proved difficult to trace to a specific reporting period Wojciech could be held to.

The business itself was never at risk of losing its franchise standing or facing operational disruption, since the tax authority worked with the payment arrangement once it understood a structured recovery was underway. Paulo and Piotr kept the business running throughout, with Piotr eventually leaving his welding job to run it full time once the tax matter was behind them. Paulo stayed on at his IT support role during the resolution, since the household still needed one steady income while the shortfall was being sorted out, and the couple treated Wojciech's structured payments as a separate, closely tracked line item rather than folding them into the business's regular cash flow.

What stayed with Paulo, he said afterward, was how differently the deal would have gone if every asset in the agreement had been priced at fair value from the start, or even if the holdback had been sized around a real risk assessment rather than a round number chosen for comfort. The eventual result was a good one given where the file started, but it came after weeks of stress and a bill for legal work that a properly structured closing would have made unnecessary.

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