How do I sell my share of a business to my partner?

Selling your half to the person you already run the business with looks simpler than selling to a stranger. There is no marketing, no stranger in the books and no need to introduce a new owner to staff. But the same questions still apply: what exactly are you selling, what do your own documents say about the sale, and how will the money and the tax work. This guide walks through those in order. It is about a sale you both want. If your partner is not keen, the answers on what happens when a partner wants out and whether a partner can force a sale fit better.

Work out what you actually own

The first step is the structure. The Canada Revenue Agency describes business income as earned from a business you operate yourself as a sole proprietorship, or with someone else as a partnership. If you and your partner carry on business as a partnership, what you own is an interest in that partnership, and the partnership agreement is the first document to read. If the business is a corporation, what you own is shares, and the sale is a sale of those shares, with the corporation’s own documents and any shareholder agreement setting the rules. Do not rely on memory: confirm the structure from the registration records and with your accountant before you talk price. Ask also whether the business owns property in its own name, holds licences or permits that name you personally, or has a lease you signed as an individual, since each of those may need separate handling when your interest changes hands.

Read the documents that limit a sale

For a corporation incorporated under the Canada Business Corporations Act, if the issue, transfer or ownership of shares is to be restricted, the articles must include a statement to that effect and a statement of the nature of those restrictions. Provincial corporate statutes have their own versions, so check which statute governs your corporation. A shareholder agreement can add more. Treadstone Law, an Ontario law firm, lists transfer restrictions among the terms a shareholders’ agreement should address when an owner sells a minority stake, such as limits on either shareholder selling to an outsider without giving the other a right of first refusal. Even if your partner is the intended buyer, the agreement may set a notice step, a valuation method or a payment schedule that you must follow. Read it before you sign anything. If the agreement is silent or unclear, ask a lawyer whether the sale needs your partner’s written consent, a director’s resolution or a change to the register of shareholders, so the paperwork matches the deal.

Agree the price and how it is paid

Price is a negotiation between the two of you, and an independent valuation can give both sides a shared starting point. Check whether your partnership or shareholder agreement already sets a formula or method for valuing an interest, and look there first. Payment terms matter as much as the number. If your partner cannot pay everything at closing, you may be paid over time, which means you become a creditor of whoever owes you the unpaid balance. Ask what security you would hold, what happens if a payment is missed, and whether the business’s own lenders restrict payments to you. Settle your release from any personal guarantees on business debts, and agree what happens to loans you made to the business. Also decide how the two of you will describe the change to staff, lenders and customers, and who signs the notices, so that nobody learns of it by rumour. A short written timeline for closing keeps both sides to the same dates.

Understand the tax before you sign

Tax can change what a given price is worth to you, so involve an accountant early. The CRA says that where you receive the proceeds over a number of years, you may be able to claim a capital gains reserve, which usually lets you report a portion of the gain by reference to the proceeds not yet received. The CRA also notes that, generally, you cannot claim a reserve in certain cases, including where you sold the capital property to a corporation you control in any way, so the buyer’s identity matters. If you sell shares, the CRA’s page on the capital gains deduction lists dispositions of qualified small business corporation shares among the eligible dispositions. Whether yours qualify depends on conditions that an accountant must test against your facts.

Put the exit in writing

Even with a long-time partner, do not rely on a handshake. Treadstone Law lists valuation disputes down the line among the risks to think through before you sign, particularly if the shareholders’ agreement does not clearly define how future share transfers or buyouts will be valued. Have a lawyer draft or review the purchase agreement, and use the checklist below to see what it needs to cover. The Business Development Bank of Canada says a lawyer familiar with business transitions can negotiate the purchase agreement and address legal issues that arise, and that an accountant can help structure the transaction to minimize tax on the sale.

• The exact interest or shares being sold, and the date ownership passes
• The price, the payment schedule, and what security you hold for any unpaid balance
• Your release from guarantees, leases and other obligations you signed for the business
• What you may do after the sale, including whether a non-compete applies to you
• Who tells customers, staff, the bank and suppliers, and what each is told