Asset purchase agreement
lawyer Toronto.
Buying or selling the assets of an Ontario business? Jonathan Kleiman drafts, reviews and negotiates asset purchase agreements for buyers and sellers, from the first draft through closing.
Already have a draft? Discuss a review before you sign. You can scope the agreement review separately from the full transaction.
· Reviewed by Jonathan Kleiman, J.D.
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An asset purchase agreement lawyer for buyers and sellers
An asset purchase agreement is the contract under which a buyer purchases the assets of a business from the person or company that owns them. The buyer takes what the agreement lists and leaves the rest. The seller keeps its company, its history and whatever wasn't sold.
That makes the agreement an exercise in drawing lines. Which assets are in and which are out? Which debts does the buyer take on? Who is responsible for the employees, the lease and the customers' deposits on the day the keys change hands? Jonathan Kleiman is a Toronto business lawyer who drafts and negotiates these agreements for either side, on deals from convenience stores, restaurants and home-based businesses to multi-million-dollar acquisitions.
- Buyers taking over a store, restaurant, clinic, service business or franchise location.
- Owners selling a business, a location or a division while keeping their company.
- Sole proprietors and partnerships, who have no shares to sell and can only sell assets.
- Anyone handed a draft by the other side's lawyer or a broker who wants it reviewed before signing.
Every engagement begins with a free 30-minute consultation. Bring the letter of intent or the draft agreement if you have one.
What an asset purchase agreement covers
Most asset purchase agreements have the same building blocks. This is what each part does and where the negotiation usually happens.
| Section | What it does | What to watch |
|---|---|---|
| Purchased assets | Lists what the buyer gets: equipment, inventory, goodwill, the name, the website, customer lists and selected contracts | Vague lists. An asset that isn't clearly described may not be included. |
| Excluded assets | Lists what the seller keeps, often cash, receivables, tax refunds and personal items | Leased or financed equipment that the seller doesn't actually own |
| Assumed and excluded liabilities | Says which of the seller's obligations the buyer takes on and confirms the rest stay with the seller | Gift cards, customer deposits, warranty work and accrued vacation pay |
| Price and allocation | Sets the price, how it's paid, the inventory count, and how the price is divided among the assets | The allocation affects both sides' tax, and their interests usually conflict |
| Employees | Says which employees the buyer will hire and who pays the costs for those it doesn't | Past service that carries over to the buyer for the staff it keeps |
| Lease and contracts | Provides for assigning the lease and the contracts the buyer needs | Consents that haven't been requested yet, and what the landlord asks for in exchange |
| Representations and indemnity | The seller's promises about the assets and the business, and the buyer's remedy if they're false | Ownership free of liens, accuracy of the financial information, and how long claims can be made |
| Closing deliveries | Lists what changes hands at closing: a bill of sale, assignments, discharges, tax elections and the non-compete | Proof that the seller's lenders have been paid out and its shareholders have approved the sale |
From first draft to closing: how an asset purchase agreement comes together
Many small and mid-sized asset purchases close 4 to 12 weeks after the letter of intent. The landlord's consent and licence transfers are the usual causes of delay, so they're worth starting early.
Structure and LOI
The parties agree that the deal is for assets, not shares, and set the price and main terms in a letter of intent. Each side's accountant should weigh in on tax before it's signed.
List what's being sold
The asset, contract and employee lists are built from the seller's records. These become the schedules to the agreement, and they do much of its work.
Due diligence and searches
The buyer reviews the lease, contracts and licences, and searches for registered security, executions and lawsuits against the seller.
Draft and negotiate
The buyer's lawyer usually prepares the first draft. The lawyers settle the liabilities, the seller's promises, the price allocation and the holdback.
Consents and approvals
The landlord, key customers or suppliers, licensing bodies, a franchisor and the seller's own shareholders may each have to sign off before closing.
Closing and after
Funds are paid, lenders are discharged, and the assets are transferred. Inventory adjustments, the holdback and the seller's transition help are dealt with afterward.
The buying-a-business due diligence checklist sets out what a buyer should review before its conditions expire, and the free due diligence checklist builder tailors the list to your deal.
The clauses that get negotiated hardest
What's in and what's out
The schedules of purchased and excluded assets decide what the buyer actually owns on closing day. Equipment should be listed by item, and leased or financed equipment should be flagged, because the seller can't sell what a leasing company owns. The business name, domain, phone numbers, social media accounts and customer data should be named specifically. They're easy to forget and awkward to chase afterward.
Assumed and excluded liabilities
A buyer of assets generally takes on the liabilities it agrees to assume, but some obligations can follow the business by law. Registered security may also remain attached to the assets until discharged. The agreement should allocate responsibility for the items that need particular attention: gift cards and prepaid services, customer deposits, warranty obligations on past work, and employees' accrued vacation. Each is either assumed by the buyer with a credit against the price, or kept by the seller with an indemnity.
Price allocation and HST
The price has to be divided among the assets: so much for equipment, so much for inventory, so much for goodwill. The split affects the income tax of both sides, and what helps one usually costs the other. HST applies to many business assets, but where the buyer is acquiring all or substantially all of the property needed to carry on the business, a joint election under section 167 of the Excise Tax Act can often remove it from most of the price. Jonathan drafts the clause, and your accountant should confirm the allocation and the election. See the guide to HST and purchase price allocation.
Employees
The buyer decides whom to hire, and the seller ends the employment of anyone who isn't hired. Under section 9 of the Employment Standards Act, 2000, an employee the buyer keeps is generally treated as continuously employed, so their years with the seller count toward notice and severance if the buyer later lets them go. The agreement should allocate those costs and say who pays accrued vacation and wages up to closing.
The seller's creditors
Ontario repealed the Bulk Sales Act in 2017, so there is no longer a statutory process for notifying the seller's creditors. A lender's registered security still follows the assets until it's discharged, though. The buyer's protection is a set of searches against the seller, payment of secured creditors out of the closing funds, the seller's promise that the assets are free of liens, and a holdback. Depending on the business, a tax clearance certificate under section 6 of the Retail Sales Tax Act may also be on the closing list.
The seller's shareholder approval
When an Ontario corporation sells all or substantially all of its property outside the ordinary course of business, section 184 of the Business Corporations Act requires the shareholders to approve the sale by special resolution. Shareholders who vote against it can have the right to dissent and be paid fair value for their shares. A seller with more than one shareholder should line up that approval early, and a buyer should ask for the resolution at closing.
Have a draft asset purchase agreement?
Send it over before you sign. Free 30-minute consultation.
The lease, the contracts and the non-compete
Assigning the lease
For a store, restaurant or clinic, the location is often most of what's being sold. The lease has to be assigned to the buyer, and most leases require the landlord's consent. Under section 23 of the Commercial Tenancies Act, that consent can't be unreasonably withheld unless the lease says otherwise, and many landlord leases do. A seller should also ask to be released from the lease and from any personal guarantee, since an assignment alone often leaves the original tenant on the hook. See the guide to assigning a commercial lease in a business sale.
Contracts, licences and permits
Customer, supplier and franchise contracts don't move to the buyer automatically. Each has to be assigned, and many need the other party's consent. Licences and permits are similar: some transfer with approval, and others need a fresh application in the buyer's name. The agreement should make the important ones conditions of closing.
The seller's non-compete
A buyer paying for goodwill will ask the seller, and usually the seller's owners personally, not to compete or solicit customers and staff after closing. Ontario courts enforce these covenants in a sale of a business when their length, territory and scope are reasonable. The guide to non-competes when buying or selling a business covers what's reasonable.
Buyer or seller: what to look for in the draft
If you're the buyer
- Detailed asset schedules, and a promise that the seller owns everything on them free of liens.
- A clear allocation of assumed and excluded liabilities, with advice on obligations that may follow the business by law.
- Landlord consent, licence transfers and financing as conditions of closing.
- A holdback to cover inventory shortfalls, undisclosed creditors and indemnity claims.
If you're the seller
- A complete list of what you're keeping, including cash, receivables and anything personal.
- A release from the lease and from personal guarantees, not only an assignment.
- A cap on indemnity claims and a date after which your promises expire.
- Security for any part of the price that's paid after closing.
How Jonathan helps with an asset purchase agreement: scope and fees
You can hire Jonathan to draft the agreement, to review and negotiate a draft from the other side, or to handle the whole transaction. The fee is quoted after he sees the deal and before any work begins. The guide to what a business lawyer costs in Toronto explains what drives legal fees on a transaction.
The services below can form part of your engagement. Your quote confirms which work and deliverables are covered by the agreed fee.
Services we can scope
- Free 30-minute consultation about the deal
- Drafting the asset purchase agreement, or reviewing the other side's draft
- Asset, liability, contract and employee schedules
- Negotiating the seller's promises, the indemnity and the holdback
- Security, execution and litigation searches against the seller, for buyers
- The lease assignment or a new lease, and the landlord's consent
- Non-competition, non-solicitation and transition terms
- Shareholder and director resolutions approving the sale
- Closing documents: bill of sale, assignments, discharges and the section 167 election form
Not included
- Tax advice on structure, price allocation and elections, which your accountant should give
- Financial due diligence on the statements and tax filings, also your accountant's job
- Business valuations, which come from an independent valuator, usually a Chartered Business Valuator
- Arranging financing, which you do with your lender or broker
- Superior Court proceedings if a deal ends in a larger dispute. Jonathan refers these to trusted litigation counsel.
Call 416-554-1639 or book a free consultation. If your deal is for the company's shares and not its assets, see the page on share purchase agreements.
FAQs.
Common questions about asset purchase agreements in Ontario.
What is an asset purchase agreement?
It's the contract under which a buyer purchases the assets of a business from the person or company that owns them. The buyer takes the assets listed in the agreement, such as equipment, inventory, goodwill, the business name and selected contracts, and generally only the liabilities it agrees to assume, subject to obligations that follow the business by law and security that remains attached to the assets. The seller keeps its company, along with everything that wasn't sold.
What is included in an asset purchase?
Whatever the agreement lists. Typical purchased assets are equipment and fixtures, inventory, the business name, the phone number and website, customer lists, goodwill, and the contracts and lease the buyer wants to take over. Cash, accounts receivable and the seller's tax refunds are often excluded. Anything that isn't clearly listed can end up in dispute, so the schedules should be detailed.
Does the buyer take on the seller's debts in an asset purchase?
Generally not. The buyer assumes only the liabilities the agreement says it assumes, and the rest stay with the seller. There are exceptions that follow the business by law, including the past service of employees the buyer keeps, and a lender's registered security stays attached to the assets until it's paid out and discharged. Searches, a payout at closing and a holdback deal with those risks.
Is HST charged on an asset purchase?
It can be. HST applies to many business assets, but where the buyer is acquiring all or substantially all of the property needed to carry on the business, the buyer and seller can often file a joint election under section 167 of the Excise Tax Act so that HST isn't charged on most of the price. There are conditions and exceptions, so both sides should confirm the election with their accountants before closing.
What happens to employees in an asset purchase?
The buyer chooses which employees to hire. Under section 9 of the Employment Standards Act, 2000, an employee the buyer keeps is generally treated as continuously employed, so years of service with the seller count toward notice and severance later. The seller remains responsible for ending the employment of staff who aren't hired. The agreement should say who pays for each.
Do the seller's shareholders have to approve an asset sale?
If the seller is an Ontario corporation selling all or substantially all of its property outside the ordinary course of business, yes. Section 184 of the Business Corporations Act requires approval by a special resolution of the shareholders, and shareholders who vote against it can have dissent rights. A buyer should ask for a copy of the resolution as a closing document.
Does the Bulk Sales Act still apply in Ontario?
No. Ontario repealed the Bulk Sales Act in 2017, so a buyer of assets no longer has to follow its creditor-notice process. The protection it offered now comes from searches against the seller, the seller's promises in the agreement, payouts of secured creditors at closing, and a holdback.
Who drafts the asset purchase agreement?
By convention the buyer's lawyer prepares the first draft, though in smaller deals it sometimes comes from the seller's lawyer or a broker's form. Whoever drafts first sets the starting point. The other side should have its own lawyer review the draft, and the same lawyer can't act for both buyer and seller.
How much does a lawyer charge for an asset purchase agreement?
It depends on the size of the deal, whether Jonathan is drafting the agreement or reviewing the other side's draft, and how many related documents are needed, such as a lease assignment, a non-compete or a vendor take-back loan. He looks at the deal in a free 30-minute consultation and quotes the fee before any work begins.
How long does an asset purchase take to close?
Many small and mid-sized asset purchases close 4 to 12 weeks after the letter of intent. The landlord's consent to the lease assignment, licence transfers and financing cause most delays. A simple purchase with a cooperative landlord and no bank financing can close faster.
Signing an asset purchase agreement? Have it reviewed first.
Send the draft or the letter of intent before you commit. Free 30-minute consultation with a Toronto asset purchase agreement lawyer.