Asset Purchase Agreements in Ontario: What Buyers and Sellers Should Know
An asset purchase allows a buyer to acquire selected parts of a business without purchasing the shares of the corporation that owns them.
The transaction may include equipment, inventory, intellectual property, customer relationships, contracts, goodwill, and the business name. The buyer may assume certain liabilities while leaving others with the seller.
This ability to select assets and liabilities can make an asset purchase attractive. It also creates a central drafting challenge: the agreement must identify precisely what is included, what is excluded, and what each party must do before and after closing.
What Is an Asset Purchase Agreement?
An asset purchase agreement is a contract governing the purchase and sale of specified business assets.
The seller may be a corporation, partnership, or sole proprietor. The buyer may be an existing company, a newly incorporated acquisition company, or an individual.
An asset purchase agreement commonly addresses:
The assets being purchased
Excluded assets
Assumed and excluded liabilities
The purchase price
Allocation of the price
Due diligence
Conditions to closing
Representations and warranties
Employee matters
Contract assignments
Tax obligations
Indemnities
Closing documents
The agreement should be tailored to the business and the assets involved.
Asset Purchase Versus Share Purchase
In a share purchase, the buyer acquires shares of the corporation. The corporation generally continues owning its assets, owing its debts, employing its workers, and remaining a party to its contracts.
In an asset purchase, the buyer acquires specifically identified assets. The seller generally retains the corporate entity and any liabilities that the buyer has not expressly agreed to assume.
A buyer may prefer an asset purchase because it can select the assets it wants and limit the liabilities it assumes. A seller may prefer a share sale for tax, simplicity, or exit-planning reasons.
However, an asset transaction can require more individual transfers, third-party consents, and operational planning. The best structure depends on the parties, the business, and the applicable tax consequences.
Identify the Purchased Assets
The agreement should clearly identify every material asset included in the sale.
Depending on the business, purchased assets may include:
Equipment, machinery, and vehicles
Inventory
Furniture and fixtures
Accounts receivable
Customer and supplier contracts
Intellectual property
Websites and domain names
Telephone numbers and social media accounts
Books and records
Permits and licences
Deposits and prepaid expenses
Goodwill
The business name
General language such as “all assets used in the business” may not provide enough certainty. Important assets should be listed in schedules, together with identifying details where appropriate.
The parties should also confirm that the seller actually owns the assets and has the right to transfer them.
Identify the Excluded Assets
The agreement should be equally clear about what the seller is keeping.
Excluded assets may include:
Cash
Certain bank accounts
Tax refunds
Insurance claims
Personal property
Related-party contracts
Corporate records unrelated to the acquired business
Specified receivables
Assets used across several business divisions
Uncertainty about excluded assets can delay closing or create disputes after the buyer takes possession.
Allocate the Purchase Price
The purchase price should be allocated among the different categories of assets.
The allocation may affect how the transaction is reported and taxed. It may also establish the value attributed to inventory, equipment, intellectual property, restrictive covenants, and goodwill.
The Canada Revenue Agency indicates that the amount allocated to each asset should generally reflect its fair market value, with the remaining amount attributed to goodwill after amounts are allocated to identifiable assets and inventory.
The buyer and seller may have different tax preferences. The allocation should therefore be negotiated with input from their accountants and reflected consistently in the agreement and tax reporting.
Address Assumed and Excluded Liabilities
An asset purchase should specify which obligations the buyer is assuming.
The buyer may agree to assume:
Obligations under assigned contracts after closing
Customer deposits
Specified warranty obligations
Certain employee-related obligations
Particular equipment leases
Other expressly identified liabilities
The seller may remain responsible for:
Taxes arising before closing
Existing litigation
Unpaid supplier invoices
Pre-closing employee obligations
Breaches of contract occurring before closing
Undisclosed liabilities
Debt not expressly assumed
The agreement between the buyer and seller does not necessarily bind a creditor. A landlord, lender, supplier, or other third party may need to consent before its contract or related liability can be transferred.
Conduct Due Diligence
The buyer should investigate the assets and business before closing.
Due diligence may include reviewing:
Ownership of the assets
Personal property liens
Financial statements
Tax records
Customer and supplier contracts
Commercial leases
Equipment leases
Employee and contractor agreements
Intellectual-property ownership
Licences and regulatory compliance
Privacy practices
Litigation and complaints
Environmental issues
Insurance claims
Condition of inventory and equipment
Ontario provides a system for searching registered security interests or liens against personal property. These searches can help determine whether a lender or other secured party claims an interest in assets the buyer intends to acquire.
If a lien is identified, the buyer may require it to be discharged at or before closing.
Transfer Customer and Supplier Contracts
A buyer does not automatically become a party to the seller’s contracts simply because it purchases the business assets.
The agreement should identify which contracts will be assigned and whether third-party consent is required.
The parties should determine:
Who will request each consent
When consent must be obtained
Whether consent is a condition of closing
What happens if a key contract cannot be assigned
Who remains responsible for pre-closing breaches
How prepaid amounts and deposits will be treated
The same review should be completed for the commercial lease. A landlord may need to consent to an assignment or enter into a new lease with the buyer.
Protect Intellectual Property and Goodwill
The buyer should confirm that the seller owns or has the right to transfer the intellectual property used in the business.
This may include:
Trademarks
Copyright
Software
Designs
Product formulations
Manuals and written materials
Trade secrets
Domain names
Social media accounts
Customer information
The agreement should include appropriate assignments and require the seller to deliver control of relevant accounts and records at closing.
If a founder, employee, contractor, or related company created important intellectual property, additional assignments may be required.
The buyer may also request reasonable non-competition and non-solicitation provisions to protect the goodwill being acquired. These restrictions should be carefully drafted for the particular transaction.
Address Employees and Contractors
In an asset purchase, employees do not necessarily move to the buyer automatically.
The parties should establish:
Which employees will receive offers
Who will terminate existing employment
Who is responsible for termination-related obligations
Whether prior service will be recognized
How vacation, bonuses, and benefits will be treated
Whether key employees must accept offers before closing
What happens to independent contractors
How employee records will be transferred
Employment and privacy obligations should be reviewed before communicating the transaction to workers or transferring personal information.
The buyer should also confirm that employees and contractors have signed appropriate confidentiality and intellectual-property agreements.
Representations, Warranties, and Disclosure
The seller may provide representations and warranties concerning:
Ownership and condition of the assets
Authority to complete the transaction
Absence of undisclosed liens
Financial information
Inventory
Material contracts
Employees and contractors
Intellectual property
Taxes
Litigation
Regulatory compliance
Environmental matters
Customer and supplier disputes
The seller may qualify these statements through disclosure schedules.
The parties should negotiate how long the representations survive closing, the process for making a claim, and any limits on liability.
Delta Law’s contract law services include drafting, reviewing, and negotiating asset purchase agreements and other commercial contracts.
GST/HST and Other Tax Issues
GST/HST may apply to the sale of business assets unless an exemption or available election applies.
Where a buyer acquires all or substantially all of the property reasonably necessary to carry on a business or part of a business, the buyer and seller may be able to jointly elect for no GST/HST to be payable on the sale by using Form GST44. The CRA generally describes “all or substantially all” as at least 90 percent of the necessary property.
The election is subject to legal requirements and does not automatically apply to every transaction or every asset.
Other tax issues may include:
Purchase-price allocation
Inventory treatment
Capital gains
Recapture of depreciation
Goodwill
Real property
Employee-related amounts
Tax clearances and remittances
The parties should obtain tax advice before signing the agreement.
Conditions and Closing Documents
The transaction may be subject to conditions such as:
Satisfactory due diligence
Buyer financing
Third-party consents
Release of liens
Assignment of the lease
Transfer of key contracts
Required regulatory approvals
Retention of key employees
Delivery of specified financial information
At closing, the parties may exchange:
Payment of the purchase price
Bills of sale
Intellectual-property assignments
Contract assignments and assumptions
Lease documents
Releases and discharges
Employment or consulting agreements
Non-competition or non-solicitation agreements
Corporate approvals
Possession of the purchased assets
The agreement should also identify any obligations continuing after closing, such as transition assistance, purchase-price adjustments, indemnities, or collection of receivables.
Use Holdbacks and Indemnities Where Appropriate
The buyer may request that part of the purchase price be held back to address a specific risk.
A holdback may be used for:
Purchase-price adjustments
Unresolved tax matters
Outstanding customer claims
Defective inventory
Undischarged liens
Warranty obligations
Other identified liabilities
The agreement should establish the amount, release date, permitted claims, and dispute process.
Indemnities may also require one party to compensate the other for losses arising from a breach, excluded liability, or specified pre-closing matter.
The parties may negotiate claim thresholds, liability caps, survival periods, and exceptions for fraud or intentional misconduct.
Plan the Operational Transition
The legal transfer must be coordinated with the practical transfer of the business.
The parties should plan for:
Customer and supplier notices
Inventory counts
Transfer of account access
Delivery of business records
Website and telephone changes
Employee communications
Transfer of licences and permits
Collection of accounts receivable
Treatment of customer deposits
Seller transition services
A detailed closing checklist can help prevent disruption when the buyer takes over the acquired operations.
Delta Law’s corporate law services can assist with transaction structuring, corporate approvals, business acquisitions, and closing documentation.
Avoid Generic Asset Purchase Templates
An asset purchase agreement should reflect the actual assets, liabilities, contracts, employees, and risks involved in the business.
A generic template may fail to address:
Liens against the assets
Non-transferable contracts
Lease consent
Intellectual-property ownership
Employee obligations
Regulatory licences
Customer deposits
Tax elections
Industry-specific risks
For more information about business acquisitions and commercial agreements, visit Delta Law’s legal resources.
This article provides general information only and does not constitute legal, tax, accounting, employment, or financial advice. The appropriate transaction structure and contractual protections depend on the business, the assets, and the parties’ circumstances.
Protect the Asset Purchase With Clear Terms
An asset purchase agreement should identify exactly what the buyer is acquiring, which liabilities are being assumed, how the price will be allocated, and what must happen before and after closing.
Delta Law assists Ontario buyers and sellers with asset purchase agreements, due diligence, business acquisitions, corporate approvals, and related commercial contracts.
