What are the legal steps to buy a business in Canada?

No single statute lays out how to legally buy a business in Canada. What exists is a sequence of documents and checks, each with its own legal consequences, plus a few rules that apply only to some deals. BDC’s guidance on the steps of buying a business describes the main path: a letter of intent, then due diligence and negotiation of the purchase agreement. Around that path sit decisions about what you are buying, searches that show who else has a claim on the assets, and filings that may apply depending on the transaction. This guide walks through them in order so you know what to raise with your lawyer and when.

The sequence: letter of intent, due diligence, agreement

BDC notes that both parties will usually want to sign a letter of intent, or something similar, before launching formal due diligence. It says the next step is due diligence and negotiating the purchase agreement. BDC also describes due diligence as giving crucial information on the target’s finances, prospects and legal issues. The final price is settled after that work, which is why the earlier documents matter. For the difference between the first two documents, see letter of intent vs purchase agreement.

Bring a lawyer in at the letter of intent stage

BDC’s advice is to involve your advisors at the letter of intent stage, naming your lawyer, accountant, transaction advisor and lender. The reason is practical. A letter of intent is not a binding offer, but BDC says it anchors the transaction terms to some degree. BDC’s guide to letters of intent adds that, where the letter so provides, it creates binding obligations, particularly on confidentiality and exclusivity. Having a lawyer read it before you sign means the terms you anchor to are ones you can live with. Ask your lawyer which provisions should bind, which should not, and what the document will say about how long the seller must deal only with you.

Decide what you are buying: shares or assets

BDC says purchasing shares comes with a very different set of responsibilities compared to purchasing assets. Ask your lawyer which liabilities would come with the company in a share purchase, and which you could leave with the seller in an asset purchase. Each structure has tax and contract consequences, which your lawyer and accountant should compare for your deal. Our guide on asset sale vs share sale covers the trade-offs. The structure also shapes the purchase agreement, so settle it early.

Search for liens before you pay

BDC’s guidance on owner liability tells buyers to search the Personal Property Security Registry to find out whether there are any liens on the assets they are about to purchase. In Quebec, the equivalent is the Register of Personal and Movable Real Rights. BDC also says a buyer can seek an indemnity agreement from the seller covering unforeseen liabilities for a period after the sale. What a registry search turns up can change the deal, so ask your lawyer to run them before closing rather than after.

Ask whether the Competition Act applies

The Competition Bureau explains that the notifiable transactions provisions in Part IX of the Competition Act require parties to notify it of certain transactions when they are of a specified type, exceed certain thresholds and are not subject to any exemptions. Whether a given purchase is caught depends on the type of transaction, the thresholds and the exemptions in the Act itself, not on a rule of thumb about deal size. Ask your lawyer to confirm in writing whether your transaction is notifiable, particularly if either side is part of a larger group.

Raise the GST/HST election early

The CRA publishes Form GST44, which parties use to elect that GST/HST does not apply to the sale of a business or part of a business. The CRA’s page on selling a business says the purchaser has to file the form no later than the due date of their next GST/HST return in which tax would have been payable without the election. The same page sets conditions: the seller must be selling the business it established or carried on, and the election cannot be made if only one or more assets of the business are sold, or if the seller is a registrant and the purchaser is not. Ask your accountant whether your deal meets them before closing.

Licences, leases and consents are part of the legal work

A purchase can depend on approvals that sit outside the agreement. If the business needs a licence or permit, ask the issuing body whether it transfers or whether you must apply in your own name. If it operates from leased premises, read the lease for a landlord consent clause. Review key customer and supplier contracts for change-of-control or assignment terms. Ask your lawyer whether each should be a condition of closing in the purchase agreement, so that you are not bound to complete a purchase before the approval arrives. Your lawyer can list which apply to your type of business and province.

• A signed confidentiality agreement and letter of intent, reviewed by your lawyer.
• A due diligence file that includes registry and lien searches.
• A decision on shares or assets, recorded in the purchase agreement.
• A written answer on any Competition Act notification.
• A decision on the GST/HST election and who files it.