Canada: Selling A Business: Top Five Tips Revealed

Business owners are often looking for opportunities to improve and grow their businesses, or in some cases, refine their exit strategies. If you're a business owner looking to sell, there are steps you can take to minimize risk and maximize value. In this article, we outline five key things to consider when selling your business, including issues surrounding confidentiality, deal structure, and of course, purchase price.

1. Require a Non-Disclosure Agreement ("NDA")

A Non-Disclosure Agreement prevents Buyers, the recipients of confidential information, from disclosing this information to third parties or using it to their benefit. It is important, when drafting a NDA, to consider the scope of the information considered to be confidential. This can be achieved by specifying (i) the information that is deemed confidential which may be the same or different for each party, (ii) which exceptions apply to the non-disclosure, if any, (iii) the purpose of the NDA and of the exchange of proprietary information and (iv) the period covered for non-disclosure. NDAs can have a term of up to five years.

2. Assets vs. Shares

Once the parties have signed a NDA, the next step to consider is whether the transaction will be structured as a sale of assets or a sale of shares. There are indeed advantages and disadvantages for the seller in each type of transaction. Nonetheless, the seller will generally prefer to sell shares rather than assets for a number of reasons. First, the sale of shares generally give rise to capital gains, half of which are then taxed resulting in an effective tax rate of one half the rate applicable to ordinary income. A tax exemption on capital gains, known as the lifetime capital gains exemption, may also be available1. It is indexed annually (up to $824,176 for the 2016 calendar year).  Furthermore, selling shares also frees the seller of the liabilities disclosed on the balance sheet of the business as well as contingent liabilities, which will be assumed by the purchaser after the sale. On the other hand, in a sale of shares, the entire business passes to the buyer, including the business name or trademark. As such, seller would not be able to continue operating a particular product line or brand or to retain certain assets, unless a particular agreement in this respect is made between the seller and the purchaser.

The tax implications of a sale of assets will depend on the tax position of the corporation prior to the sale, the allocation of the purchase price among the assets being sold and how and when the proceeds of the sale are paid out by the corporation to its shareholders (i.e. whether or not there is an earn‑out clause). If an asset sale has been agreed upon, the seller and the buyer must then agree on how the purchase price is to be allocated among the assets being sold. In such cases, the buyer will prefer to allocate as much of the purchase price as possible to inventory or depreciable property in order to minimize future taxable income. The seller, on the other hand, will want to ensure that the allocation of the purchase price minimizes the recapture of any capital cost allowance previously deducted on depreciable property or a realization of income on the sale of inventory.

Whether the seller opts for a sale of assets or a sale of shares, the tax implications are numerous and should not be overlooked. Thus, proper due diligence in this respect is essential.

3. Good Housekeeping

Once the buyer and the seller have agreed as to whether assets or shares are to be sold, they will enter into a purchase and sale agreement containing the terms and conditions of the transaction. It will also provide for various representations and warranties by the parties. It is therefore essential for the seller to ensure that the corporation is ready to be sold and that representations and warranties regarding corporate existence and compliance with the law and internal regulations are true. Firstly, does the seller possess the original shares of the corporation? Sellers, we recommend that you update your minute books and corporate records at least one year before negotiating a sale of your business. An up-to-date minute book is important to ensure compliance with federal and provincial corporate legislation. In addition, in the context of a sale of shares the minute book may be reviewed by buyer's counsel as part of the due diligence process. Resolutions passed by shareholders and directors validate corporate actions such as declarations of bonuses and/or dividends.

Secondly, in the context of a sale of a business, it may be important to ensure that the assets being sold are free and clear from third party liens, the buyer has agreed to them. In such a case, the buyer expects the seller to obtain the proper releases from equipment lessors, lenders and landlords etc.

Thirdly, if certain contracts entered into between the seller and third parties contain a consent for a change of control clause, the seller should ensure to obtain such consent before the transaction. Before this can occur, an inventory must be taken of agreements to confirm which have a change of control clause.

Additionally, if the seller believes its intellectual property, both registered and unregistered, is valuable, it must be able to describe the IP in detail.

4. Compliance Questions

Regardless of whether the seller is planning to sell shares or assets, the parties to the transaction will need to comply with any statutory requirements. For instance, the transaction may require that the parties abide by certain provisions of the Investment Canada Act or the Competition Act (Canada). This may also be the case depending on the industry in question in which a regulator may impose certain notification or approval requirements. For example, in insurance, there are requirements relating to the regulator, the Autorité des marchés financiers du Québec.

When selling shares, the seller of shares should be in a position to warrant that the business holds all of the permits and licenses necessary to carry on the business post-closing.

5. Transition to Life after Closing

In the context of a sale of shares, the buyer will inherit all of the seller's employees. In the context of an asset sale, the buyer may determine that only certain employees will be transferred. Nonetheless, the law protecting employees in Québec may deem that the buyer has "inherited" the employment relationship for all employees of the business, in which case the purchase agreement should be clear on which party bears the cost of termination of those employees not retained by buyer. Responsibility for all obligations relating to the employees post-closing including benefits should also be provided for in the purchase agreement.

The seller should expect to be required to enter into a non-competition and non-solicitation agreement. In the Payette v. Guay Inc2 affair, the Supreme Court of Canada determined that a 5-year period for a non-competition clause was reasonable. In this particular case, the rules for restrictive covenants relating to employment did not apply with the same intensity because the obligations were assumed in the context of a commercial contract where the covenantor benefited from the proceeds of the sale3

We have saved the best for last: purchase price! The formula setting out the calculation of the purchase price must be described clearly. In some instances, the purchase price will be based on an "earnout" which means that a portion of the purchase price will be paid at closing with the remainder to be paid in the future based on the future performance of the company that is being acquired. Proper documentation evidencing and securing the unpaid portion of the purchase price is essential.

At any stage of the transaction, the professionals at Gowling WLG can assist you.


1. The seller must be a Canadian resident and the shares must meet the criteria of "qualified small business corporation shares". To qualify as shares of small business corporation, (i) the corporation must be a Canadian-controlled private corporation, (ii) at the time of sale at least 90% of the corporation's assets must be used in carrying on an "active business" in Canada, and (iii) throughout the 24 months period preceding the sale, more than 50% of the corporation's assets were used principally (50% or more) in carrying on an active business in Canada. The shares were owned by the seller for at least 24 months prior to the sale.

2. 2013 SCC 45

3. According to the Court, parties negotiating the sale of a business have greater freedom of contract than parties negotiating a contract of employment, both at common law and in the civil law of Quebec.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
26 Sep 2019, Seminar, London, UK

Providing GCs, Heads of Legal and senior in-house lawyers with timely, topical and practical legal advice on a variety of topics.

8 Oct 2019, Seminar, Birmingham, UK

Supporting the development of paralegals, trainees and lawyers of up to five years' PQE by providing valuable knowledge and guidance together with practical tips.

10 Oct 2019, Seminar, London, UK

Supporting the development of paralegals, trainees and lawyers of up to five years' PQE by providing valuable knowledge and guidance together with practical tips.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions