How does a seller consulting agreement work in a business sale?

A seller consulting agreement is a separate contract signed with the purchase agreement. It keeps the former owner available to the buyer for a set period and defined work, such as introducing customers, training staff and answering questions. Its value to both sides depends on how clearly it is written and how the relationship will actually run.

What the contract fixes

Settle the term, the scope of work, the hours or availability expected and who the seller reports to. Settle how the seller is paid and when, what happens if either side wants to end it early, and who owns anything the seller creates. Confidentiality and a clear end date help both sides. If the buyer wants the arrangement to run beyond the first handover, say so in the agreement rather than leaving it open.

Employee or consultant

The Canada Revenue Agency says an employee generally works under the direction and control of the payer in a contract of service, and is an integral part of the payer’s business. A self-employed worker enters a contract for services and is not under the payer’s direction or control. The CRA also says all the facts, including the actual terms and conditions, determine status, not just the parties’ intention. Calling the seller a consultant does not settle it.

Why it matters for the non-compete

Ontario’s Employment Standards Act, 2000, s.67.2(1), prohibits an employer from entering into an employment contract or other agreement with an employee that is, or includes, a non-compete agreement. Section 67.2(3) makes an exception where, on a sale of a business, the seller agrees not to compete and, immediately following the sale, becomes an employee of the purchaser. Section 67.2(4) separately excludes executives. Whether the seller is an employee or a consultant can therefore change how that provision applies. The non-compete answer covers enforceability more broadly.

Fees and the purchase price

Section 68 of the Income Tax Act applies where an amount received can reasonably be regarded as partly consideration for a disposition of property, for services or for a restrictive covenant. The parts are treated as those things irrespective of the form or legal effect of the contract, though s.56.4(5) can stop s.68 from applying to some restrictive covenants. Consulting fees and the price are therefore not insulated from each other by the label. Ask your accountant how the fees will be characterised.