How to Buy Out a Business Partner in Ontario
A business partner buyout may become necessary when one owner wants to retire, pursue another opportunity, reduce their involvement, or leave following a disagreement.
The owners may agree that a separation is best, but agreeing that someone should leave is only the beginning. They must also determine what is being purchased, who will make the purchase, how the interest will be valued, when the purchase price will be paid, and which obligations will continue after closing.
A properly structured buyout can give the departing owner a clear exit while allowing the remaining owner or owners to continue operating the company. A poorly documented transaction can leave both sides exposed to unpaid purchase amounts, tax consequences, personal guarantees, customer disputes, and future legal claims.
This guide explains the principal legal and commercial issues involved in buying out a business partner in Ontario.
Is the Person a Partner or a Shareholder?
Business owners frequently refer to each other as partners even when their company is incorporated.
Legally, there is an important difference.
In a partnership, the individuals or entities operate a business together as partners.
In a corporation, the business is operated through a separate legal entity, and the owners generally hold shares in that corporation.
If the business is incorporated, the transaction will usually involve the purchase of a shareholder’s shares rather than the removal of a legal partner.
Before planning the buyout, confirm:
The legal name of the business
Whether it is a corporation, partnership, or sole proprietorship
Who legally owns the shares or partnership interests
The number and class of shares held by each person
Whether any shares are held through a holding company or trust
Whether the departing owner has outstanding shareholder loans
Whether there are undocumented ownership claims
Whether the corporate records reflect the parties’ understanding
The structure of the business will affect the required agreements, approvals, tax treatment, and closing documents.
Can You Force a Business Partner to Accept a Buyout?
Not necessarily.
If the business is incorporated, a shareholder generally owns their shares until they voluntarily sell them, a contractual buyout provision applies, the corporation validly redeems or purchases the shares, or a court orders another result.
The other shareholders cannot ordinarily confiscate the shares simply because they hold a majority of the voting power or no longer want to work with the shareholder.
A forced buyout may be possible if there is:
A mandatory buyout provision in a shareholders’ agreement
A buy-sell or shotgun clause
A redemption right attached to the shares
A vesting or repurchase agreement
A settlement agreement
A court order
Another legally enforceable purchase right
If there is no such right, the parties will usually need to negotiate a voluntary sale.
A shareholder may be removed as a director, officer, or employee without losing their shares. Ending one role does not automatically terminate the others.
Start by Reviewing the Existing Agreements
Before making an offer, the parties should review all existing business and corporate documents.
These may include:
The shareholders’ agreement
A partnership or founders’ agreement
Articles of incorporation
Corporate bylaws
Share subscription agreements
Share certificates and the securities register
Vesting agreements
Employment or contractor agreements
Shareholder loan documents
Personal guarantees
Intellectual-property assignments
Banking and financing documents
Insurance policies
Previous purchase or investment agreements
Director and shareholder resolutions
The shareholders’ agreement may already establish the process that must be followed.
It may specify:
Events that trigger a buyout
Who can initiate the process
How notice must be delivered
Who must purchase the shares
How the purchase price will be calculated
Whether a valuation discount applies
When payment must be made
Whether instalments are permitted
How disputes will be resolved
Which obligations continue after closing
Ignoring an existing contractual process can create additional claims and may invalidate the attempted transaction.
Step 1: Determine What Is Triggering the Buyout
The reason for the buyout can affect the process, valuation, and payment terms.
Common triggering events include:
Voluntary retirement
A shareholder’s resignation
Termination of employment
Long-term disability
Death of a shareholder
Bankruptcy or insolvency
Material breach of an agreement
Fraud or serious misconduct
Failure to perform an agreed role
Loss of a required professional licence
A shareholder deadlock
A marriage breakdown
An attempted unauthorized share transfer
A decision to sell the company
A breakdown in the shareholders’ relationship
If an agreement distinguishes between a good leaver and a bad leaver, the reason for departure may affect the purchase price or payment period.
The parties should confirm whether the triggering event has actually occurred and whether any notice, cure period, or dispute-resolution requirement must be followed.
Step 2: Decide Who Will Purchase the Interest
A departing shareholder’s shares may be purchased by:
One remaining shareholder
Several remaining shareholders
A new investor
A holding company
The corporation itself
A combination of purchasers
The choice of purchaser can have significant legal, financial, and tax implications.
Purchase by the remaining shareholders
The remaining shareholders may buy the shares personally or through their respective holding companies. The purchase increases their ownership percentage without requiring the corporation to fund the transaction directly.
However, the purchasers must obtain the money required to complete the sale.
Purchase by the corporation
Ontario corporate legislation generally allows a corporation to purchase or otherwise acquire its own issued shares, subject to its articles and statutory restrictions. The corporation must consider applicable solvency requirements before completing the purchase.
A corporate purchase may reduce the number of outstanding shares, leaving the remaining shareholders with proportionately greater ownership.
This structure should be reviewed with legal and tax advisers before it is selected. A corporate share purchase can produce different tax consequences from a direct sale to another shareholder.
Purchase by a new investor
A new investor may purchase the departing owner’s shares. The remaining shareholders should review any transfer restrictions, approval requirements, rights of first refusal, or other conditions before allowing an outside party to become an owner.
Step 3: Establish the Value of the Ownership Interest
Valuation is often the most difficult part of a business partner buyout.
The departing owner may focus on the company’s potential, customer relationships, and years of work invested in the business. The remaining owners may focus on current cash flow, debt, operational risk, and the cost of replacing the departing person.
A business can be valued using different approaches.
Asset-based valuation
This approach considers the value of the company’s assets after deducting its liabilities.
It may be appropriate for an asset-heavy company, but it may not fully capture goodwill, intellectual property, customer relationships, or future earnings.
Earnings-based valuation
This approach applies an industry or market multiple to normalized earnings, EBITDA, or another measure of profitability.
The parties may disagree about:
Which financial period should be used
Which expenses should be added back
Whether owner compensation is above or below market
Whether unusual revenue should be included
Which multiple is appropriate
Whether future growth should affect the value
Revenue-based valuation
Some businesses are valued using a multiple of annual or recurring revenue. This approach may be more common in industries where revenue is predictable, but it may not adequately account for profitability or customer concentration.
Market-based valuation
This approach compares the company to similar businesses that have recently been sold. Reliable comparison information may not always be available for privately held businesses.
Independent business valuation
The parties may jointly retain a qualified business valuator to provide an independent valuation.
The engagement should clarify:
The valuation date
The scope of the valuation
The information the company must provide
Whether the conclusion is binding
How the valuator is selected
Who pays the valuation costs
How errors or disputed assumptions will be addressed
Should a Minority Discount Apply?
A departing shareholder may hold less than 50 percent of the company.
The purchaser may argue that a minority interest is worth less because it does not provide control over the corporation. The seller may argue that no minority discount should apply, particularly where the buyout is mandatory or results from a dispute caused by the controlling shareholders.
Whether a discount applies depends on:
The shareholders’ agreement
The reason for the buyout
The rights attached to the shares
The shareholder’s level of control
The applicable valuation standard
The wording of any court order
The surrounding circumstances
The parties should not assume that a minority discount automatically applies.
Step 4: Address Shareholder Loans Separately
Share ownership and shareholder loans are different.
A departing shareholder may have:
Lent money to the corporation
Advanced funds to pay expenses
Left declared dividends unpaid
Personally paid corporate liabilities
Borrowed money from the corporation
Received advances that remain outstanding
The buyout agreement should specify whether these amounts are:
Included in the purchase price
Repaid separately at closing
Repaid over time
Set off against amounts owed by the shareholder
Assigned to the purchaser
Forgiven as part of the settlement
Failing to address shareholder loans can result in substantial disputes after the shares have already been transferred.
Step 5: Negotiate the Payment Structure
The buyer may not have enough cash to pay the full purchase price at closing.
The parties may agree to:
Full payment at closing
A deposit with the balance due at closing
Instalment payments
A promissory note
Vendor financing
An earnout
Insurance-funded payment
A combination of these structures
Instalment payments
If the price will be paid over time, the agreement should address:
The payment schedule
The interest rate
The maturity date
Whether early repayment is permitted
Events of default
Acceleration of the outstanding balance
Security for payment
Financial reporting during the payment period
Restrictions on distributions or new debt
What happens if the business is sold
The departing shareholder should consider what will secure the unpaid amount after control of the business has been surrendered.
Possible security may include:
A personal guarantee
A corporate guarantee
A general security agreement
A pledge of the purchased shares
Escrow arrangements
Other negotiated collateral
Any proposed security should be coordinated with the company’s existing lenders and financing documents.
Earnouts
An earnout makes part of the purchase price dependent on the company’s future performance.
The parties should define:
The performance metric
The measurement period
Applicable accounting principles
Who controls the business during the earnout
Which expenses may be deducted
How extraordinary transactions are treated
The seller’s access to financial information
How calculations may be challenged
What happens if the company is sold
Earnouts can bridge a valuation gap, but they can also create disputes if the calculation is not precise.
Step 6: Consider the Tax Consequences Before Signing
The structure of the buyout can significantly affect the tax consequences for the buyer, seller, and corporation.
The sale of shares may result in a capital gain or loss. The Canada Revenue Agency generally calculates a capital gain by subtracting the adjusted cost base and applicable selling expenses from the proceeds of disposition.
Depending on the circumstances, a seller disposing of qualifying small business corporation shares may be eligible for a capital gains deduction. The applicable requirements should be reviewed with a qualified accountant or tax adviser before the transaction is finalized.
Other tax issues may include:
Whether the seller qualifies for available deductions
The tax treatment of a corporate purchase or redemption
The treatment of shareholder loans
Whether instalment payments affect reporting
The tax consequences of an earnout
Whether a holding company should be involved
The allocation of transaction costs
Whether pre-closing restructuring is appropriate
The legal agreement should reflect the agreed tax structure, but neither side should rely solely on the agreement without obtaining tax advice.
Step 7: Negotiate a Share Purchase Agreement
The share purchase agreement is the central document for most incorporated business buyouts.
It identifies the shares being sold and establishes the terms on which ownership will transfer.
A properly drafted agreement may address:
The identity of the seller and purchaser
The number and class of shares
The purchase price
Deposits and payment terms
Purchase-price adjustments
Shareholder loans
Conditions that must be satisfied before closing
Representations and warranties
Indemnities
Closing documents
Tax matters
Confidentiality
Restrictive covenants
Releases
Dispute resolution
Post-closing cooperation
Remedies for breach
The agreement should be tailored to the circumstances. A cooperative retirement buyout may require different protections from a buyout negotiated after allegations of misconduct.
Delta Law’s contract law services include drafting, reviewing, and negotiating share purchase agreements, settlement agreements, shareholders’ agreements, and other commercial contracts.
Step 8: Decide Which Representations and Warranties Are Required
Representations and warranties are statements made by the parties about specified facts.
The seller may be asked to confirm matters such as:
Legal ownership of the shares
Authority to complete the sale
Absence of undisclosed liens on the shares
Accuracy of corporate records
Compliance with material contracts
Tax filings and liabilities
Pending litigation
Employee matters
Ownership of intellectual property
Customer and supplier disputes
Undisclosed corporate liabilities
In an internal shareholder buyout, the purchaser may already know a great deal about the business. However, that does not necessarily eliminate the need for contractual protection.
The parties should negotiate:
Which representations are appropriate
How long they survive closing
Whether liability is capped
Whether a deductible or threshold applies
Which claims are excluded from the cap
Whether the purchaser already knew of the relevant issue
The process for making a claim
Step 9: Deal With Personal Guarantees
A departing shareholder may have personally guaranteed:
A commercial lease
A bank loan
A line of credit
Equipment financing
A corporate credit card
Supplier obligations
Government financing
Other corporate debts
Selling the shares does not automatically release the shareholder from these guarantees.
The creditor must generally agree to release the guarantor. The remaining owners may need to provide replacement guarantees or renegotiate the underlying obligation.
The agreement should specify:
Which guarantees exist
Who will request the release
Whether release is a closing condition
What happens if the creditor refuses
Whether the corporation will indemnify the departing shareholder
Whether funds will be held back until release is obtained
An indemnity from the corporation may provide contractual protection, but it is not the same as an actual release from the creditor.
Step 10: Address Employment and Management Roles
If the departing shareholder also works in the company, the buyout should address their other roles.
The closing documents may include:
Resignation as a director
Resignation as an officer
Termination or resignation from employment
Termination of a contractor agreement
Return of company property
Removal of signing authority
Removal from bank accounts
Transfer of passwords and records
A transition-services arrangement
A consulting agreement
A public or customer-facing announcement
The parties should determine whether the person will leave immediately or assist with a transition.
If the person is an employee, separate employment-law obligations may apply. The parties should avoid assuming that payment for the shares satisfies all employment-related entitlements.
Step 11: Protect Confidential Information and Business Relationships
A departing owner may have extensive knowledge of the company’s:
Pricing
Customers
Suppliers
Business plans
Financial information
Trade secrets
Processes
Employees
Marketing strategies
Intellectual property
The buyout agreement may include provisions dealing with:
Confidentiality
Return and deletion of company information
Non-solicitation of customers
Non-solicitation of employees
Intellectual-property ownership
Non-disparagement
Public announcements
Competition with the business
Restrictive covenants should be drafted carefully. An excessively broad restriction may be difficult to enforce.
The agreement should protect legitimate business interests without imposing restrictions that are unnecessary or unreasonable in the circumstances.
Step 12: Negotiate Mutual Releases
A buyout should provide as much certainty as reasonably possible.
If the parties have existing disputes, they may exchange mutual releases that prevent either side from later pursuing specified claims.
A release may address claims relating to:
Share ownership
Management decisions
Employment
Compensation
Dividends
Shareholder loans
Reimbursement of expenses
Alleged breaches of contract
Fiduciary duties
Access to information
Past corporate conduct
The parties may exclude certain matters from the release, such as:
Obligations under the buyout agreement
Unpaid instalments
Tax obligations
Fraud or intentional misrepresentation
Continuing confidentiality obligations
Indemnity claims
Unknown liabilities of a specified kind
The scope of the release should be clear. An overly broad release may unintentionally eliminate a claim that the parties intended to preserve.
Step 13: Complete the Corporate Approvals and Records
Signing a purchase agreement may not be the final step.
The parties may also need:
Director resolutions
Shareholder resolutions
Waivers of transfer restrictions
Waivers of rights of first refusal
Resignations
Share-transfer forms
Endorsed or cancelled share certificates
Updates to the securities register
Updates to director and officer registers
New share certificates
Amendments to signing authorities
Regulatory or government filings
Updates to the corporate minute book
If the corporation is purchasing its own shares, additional corporate approvals and solvency considerations may apply.
The corporate records should accurately reflect the ownership structure after closing.
Delta Law’s corporate law services can assist with structuring the buyout, preparing corporate approvals, completing ownership changes, and updating the corporation’s records.
What If the Owners Cannot Agree on a Price?
If the owners agree that a buyout should occur but cannot agree on value, they can consider:
Jointly appointing an independent business valuator
Obtaining separate valuations and comparing the results
Using mediation
Appointing an arbitrator for the valuation issue
Negotiating a price range
Using an earnout to address uncertain future performance
Using staged payments with adjustments
Selling the entire company to a third party
The parties should avoid making unsupported assumptions based solely on gross revenue, initial capital contributions, or the amount they personally believe their work was worth.
A valuation should reflect the company’s actual financial and commercial circumstances.
What If One Owner Refuses to Sell?
If there is no contractual right to force a sale, the remaining owners may have limited options.
They can consider:
Making a voluntary purchase offer
Negotiating through legal counsel
Using mediation
Triggering an available buy-sell provision
Restructuring management responsibilities
Enforcing documented employment or operational obligations
Pursuing claims for misconduct
Seeking an oppression remedy where legally justified
Applying for a winding-up order in appropriate circumstances
Negotiating a sale of the entire business
Litigation should be evaluated carefully. It can be costly, public, and disruptive to the company.
The corporation must also continue operating during the dispute. Customers, employees, lenders, and suppliers may be affected if the disagreement interferes with decision-making.
Can You Buy Out a Partner Who Is Not Pulling Their Weight?
The remaining owners can offer to buy the person’s interest, but poor performance does not automatically entitle them to take back the shares.
The parties should determine:
Whether the shareholder had documented responsibilities
Whether those responsibilities were tied to share ownership
Whether the shares were subject to vesting
Whether employment termination triggers a buyout
Whether a default provision applies
Whether the corporation has suffered measurable losses
Whether the shareholder breached fiduciary or contractual duties
Whether a negotiated separation is possible
A performance improvement plan may be appropriate if the person is an employee.
However, failing a performance plan will not usually cancel fully issued shares unless an enforceable agreement clearly connects the failure to a mandatory sale.
Should the Buyout Be Completed Before the Shareholder Leaves?
The timing depends on the circumstances.
In a cooperative departure, the parties may sign the agreement and complete the transfer on an agreed future date.
In a hostile dispute, the parties may need an interim agreement addressing:
Access to company systems
Signing authority
Communications with customers and employees
Use of corporate funds
Confidentiality
Management responsibilities
Preservation of documents
New contracts and spending
Distribution of profits
Negotiations with third parties
The parties should avoid leaving the company in an uncertain state while they negotiate the final purchase.
Common Business Partner Buyout Mistakes
Relying on a verbal agreement
A verbal understanding may not adequately establish the price, payment terms, release, transfer date, or continuing obligations.
Transferring the shares before securing payment
If the price will be paid over time, the seller should consider appropriate security before transferring control.
Ignoring shareholder loans
The parties may complete the share sale and later discover that substantial loans or advances remain outstanding.
Forgetting personal guarantees
A departing owner may remain personally responsible to a lender or landlord long after leaving the company.
Using an outdated valuation
A valuation based on old financial information may not reflect current debt, profitability, customer losses, or business growth.
Failing to obtain tax advice
The selected purchaser and payment structure may create unintended tax consequences.
Treating employment and ownership as the same thing
Terminating employment does not automatically transfer shares, and purchasing shares does not necessarily resolve employment entitlements.
Using a generic agreement
A basic template may not address instalment security, shareholder loans, guarantees, releases, transition obligations, tax treatment, or disputed liabilities.
Failing to update corporate records
If the securities register and minute book are not updated, uncertainty may remain about who legally owns the shares.
For additional information about shareholder agreements, corporate governance, and commercial contracts, visit Delta Law’s legal resources.
This article provides general information only and does not constitute legal, tax, or accounting advice. The appropriate buyout structure depends on the corporation’s documents, applicable legislation, tax circumstances, and the specific facts of the transaction.
Structure the Buyout Properly
A business partner buyout should clearly address valuation, payment, shareholder loans, personal guarantees, releases, continuing obligations, and corporate approvals. Resolving these matters before the shares are transferred can reduce the risk of future disputes and protect the ongoing business.
Delta Law assists Ontario business owners with shareholder buyouts, share purchase agreements, corporate reorganizations, shareholders’ agreements, and related commercial contracts.
