Received An Offer To Buy Your Business? What Happens Next

You built your business from the ground up. Long hours, tough decisions, and years of hard work. And now, someone is knocking on your door with a cheque in hand. Maybe it was an unexpected phone call from a competitor. Maybe a private equity firm reached out through LinkedIn. Maybe your business broker found someone interested.

Whatever the case – getting an offer to buy your business is a big deal. It can feel exciting, overwhelming, and confusing all at once. Most business owners have never been through a sale before, and many don’t know what to do next.

This guide walks you through the business acquisition process in Canada – step by step, in plain language. Whether you’re seriously considering the offer or just want to understand your options, this is your starting point.

Step 1: Understand Why the Buyer Wants Your Business

Before you get into numbers and lawyers, ask yourself: why does this buyer want your business? Understanding their motivation gives you enormous power in the negotiation.

Buyers generally fall into a few categories:

• Strategic Buyers – These are often competitors or companies in related industries. They want your customers, your staff, your contracts, or your market share. They tend to pay a premium because your business fills a gap in their own operations.
• Financial Buyers – Private equity firms, family offices, and investment groups fall into this category. They are looking for a business that generates reliable cash flow. They may intend to hold it for five to seven years and then sell it again.
• Individual Buyers – These are entrepreneurs who want to step into a business rather than build one from scratch. They often bring their own bank financing and may want you to stay involved for a transition period.
• Employees or Management Teams – Sometimes the offer comes from within. A management buyout (MBO) happens when your own leadership team pools resources to acquire the business.

Knowing why the buyer is interested tells you what they value most – and what levers you can pull during negotiations.

Illustration: Strategic vs. Financial Buyer

Imagine you own a regional logistics company with 40 trucks and 80 employees. A national courier firm approaches you – they want your southern Ontario routes and your long-term client contracts. That’s a strategic buyer. They may pay more than the company’s financial value alone because the acquisition saves them years of market development. On the other hand, a private equity firm looking at your EBITDA (earnings before interest, taxes, depreciation, and amortization) and wanting a 15% annual return is a financial buyer. They’ll value you differently. 

Step 2: Sign a Confidentiality Agreement Before Sharing Information

Once you decide to engage with a buyer – even informally – you need a Confidentiality Agreement (also called a Non-Disclosure Agreement, or NDA) in place before sharing anything sensitive.

Think about what happens if the sale doesn’t go through. The buyer will have walked through your financials, met your key employees, and learned the names of your top clients. Without a confidentiality agreement, there’s nothing stopping them from using that information to compete against you, poach your staff, or approach your customers directly.

A well-drafted NDA should cover:

• What information is considered confidential (financial records, client lists, pricing, trade secrets, etc.)
• How long the confidentiality obligation lasts (typically two to three years after the deal falls through)
• What the buyer can do with the information – and what they absolutely cannot do
• Who within the buyer’s organization is permitted to see the information
• What happens if there’s a breach – including the right to seek injunctive relief

In Canada, NDAs are governed by contract law and are enforceable across all provinces. Courts will look at the reasonableness of the scope and duration. Make sure yours is drafted by a lawyer who understands business transactions.

Step 3: Determine the True Value of Your Business

Before you can negotiate, you need to know what your business is actually worth. This is one of the most misunderstood parts of selling a business. Most owners either overestimate their value (because of emotional attachment) or underestimate it (because they’ve never had a formal valuation done).

A business valuation is a professional assessment of what a willing buyer would pay a willing seller on the open market. There are several common approaches:

A Chartered Business Valuator (CBV) in Canada can provide an independent opinion of value. This is especially important if you suspect the buyer’s offer may be below market, or if there are multiple shareholders whose interests need to be accounted for.

You should also consider vendor due diligence at this stage – essentially conducting your own review of the business before the buyer does. This helps you identify and fix any problems (outdated contracts, unclear title to assets, unresolved tax issues) before they become negotiating leverage for the buyer.

Step 4: Receive a Letter of Intent (LOI)

Once initial conversations have gone well, the buyer will typically submit a Letter of Intent – often called an LOI or a Memorandum of Understanding (MOU). This is a written document that sets out the key commercial terms of the proposed transaction before a formal legal agreement is drafted.

An LOI typically includes:

• The proposed purchase price (or a price range)
• The structure of the deal – whether it’s an asset purchase or share purchase (explained in Step 6)
• The exclusivity period – how long the buyer has to complete the deal before you can talk to other buyers
• The due diligence timeline
• Key conditions (financing approvals, regulatory approvals, etc.)
• Any deposit or earnest money requirements

Here’s the critical question every seller asks: is the LOI legally binding?

The honest answer is: it depends on how it’s written. In Canada, courts have found that even documents labelled ‘non-binding’ can create legal obligations depending on the language used and the conduct of the parties.

Case Law: Wallace v. Allen | 2009 ONCA, Ontario Court of Appeal

The Ontario Court of Appeal held that a Letter of Intent can be legally binding even when it states it must be ‘reduced into a binding agreement.’ The Court looked at the language used – including phrases like ‘it is agreed’ and ‘shall’ – and the conduct of the parties. The seller had announced his retirement and referred to the buyer as the new owner, which the Court took as evidence that both parties treated the LOI as binding. Key takeaway: Courts look at substance and conduct, not just the label on the document.

This is why it’s so important to have a lawyer review the LOI before you sign it. Even commercial terms that are meant to be non-binding can inadvertently become enforceable if the language is sloppy.

Step 5: Due Diligence Begins

After the LOI is signed, the buyer will begin their due diligence process. This is their opportunity to verify everything you’ve told them about the business – and to find anything you haven’t mentioned.

Due diligence is thorough, detailed, and can feel intrusive. Buyers and their advisors will request access to a wide range of documents and information, usually shared through a secure online data room. You can expect them to review:

• Three to five years of financial statements and tax returns
• Corporate records (minute books, shareholder agreements, share registers)
• All material contracts – with customers, suppliers, landlords, and lenders
• Employment agreements, benefit plans, and any outstanding HR issues
• Intellectual property – trademarks, patents, software, domain names
• Regulatory compliance – licences, permits, environmental records
• Litigation history – any pending or threatened claims
• Real estate – whether owned or leased

The due diligence phase typically lasts four to eight weeks for smaller transactions and can extend to several months for larger or more complex deals.

Case Law: 10443204 Canada Inc v. 2701835 Ontario Inc. | 2022 ONCA 745 | Ontario Court of Appeal

A coin laundry business was sold in Brampton, Ontario. After closing, the buyer defaulted on payment and alleged that the seller had misrepresented the business’s income. The trial court initially dismissed the claim, pointing to an ‘entire agreement clause’ and the buyer’s opportunity to conduct due diligence. The Ontario Court of Appeal reversed this and confirmed that even where an entire agreement clause exists and due diligence was available, a seller cannot use these to shield fraudulent misrepresentation.

Key takeaway for sellers: Be scrupulously honest about your financials during due diligence. Misrepresentations – even if buried in the deal documents – can come back to haunt you. 

As a seller, you have obligations too. You will be required to make representations and warranties in the purchase agreement – essentially, formal legal promises about the state of the business. If any of those representations turn out to be false, you can be held liable even after the deal closes.

This is why proper preparation before going to market is so valuable. Conduct a vendor due diligence exercise with your own advisors first. Identify and resolve any issues – expired licences, loose shareholder agreements, undocumented employee terms – before the buyer finds them.

Step 6: Asset Sale vs Share Sale – What’s the Difference?

This is one of the most important decisions in any business sale, and it affects both what you receive and what you owe in taxes. Understanding the difference between an asset sale and a share purchase is essential before you agree to anything.

Asset Sale

In an asset sale, the buyer purchases specific assets of the business – equipment, inventory, client contracts, goodwill, intellectual property – but does not acquire the corporate entity (the company itself) or its historical liabilities. The selling corporation receives the proceeds, and then distributes the money to shareholders.

Buyers typically prefer asset sales because they get a clean start without inheriting the company’s unknown liabilities (lawsuits, tax debts, environmental obligations). For sellers, the tax treatment is often less favourable because proceeds are taxed at the corporate level before reaching your pocket.

Share Purchase

In a share purchase, the buyer acquires the actual shares of the corporation. This means they acquire everything – assets and liabilities alike. For sellers, this is generally the more tax-efficient route, particularly if the shares qualify for the Lifetime Capital Gains Exemption (LCGE).

The Lifetime Capital Gains Exemption (LCGE) is one of the most powerful tax tools available to Canadian business owners. As of June 25, 2024, the LCGE limit was increased to $1.25 million on the sale of qualifying small business corporation shares. This means you may be able to shelter up to $1.25 million of your capital gain from tax entirely – potentially saving hundreds of thousands of dollars.

Step 7: Negotiating the Purchase Agreement

Once due diligence is complete and the buyer remains interested, both sides move to negotiate and draft the formal Purchase Agreement. This is the legally binding contract that governs the sale. It is long, detailed, and consequential – and every word matters.

Key provisions in a business purchase agreement include:

• Purchase Price and Payment Terms – Is the full amount paid at closing? Are there installments, a vendor take-back mortgage, or an earn-out arrangement (where part of the price depends on future performance)?
• Representations and Warranties – Formal promises from both sides about the state of the business and the transaction. As a seller, you’ll warrant that your financials are accurate, there are no undisclosed lawsuits, all contracts are in good standing, and many other things.
• Indemnification – What happens if something turns out to be wrong after closing? Indemnity provisions set out who is responsible for what, and for how long.
• Closing Conditions – What needs to happen before the deal is finalized? Common conditions include regulatory approvals, landlord consent to lease assignment, and key employee agreements.
• Escrow Arrangements – Part of the purchase price may be held in escrow (usually 10–15%) for six to twenty-four months after closing as security for the seller’s indemnity obligations.
• Non-Compete Agreements – Buyers will typically require the seller to agree not to start a competing business for a defined period (usually two to five years) and within a defined geographic area.
• Transition Support – What role, if any, will you play after closing? Many deals include a transition period of three to twelve months where the seller continues in an advisory or management capacity.

Negotiation is normal and expected. Very few purchase agreements are signed exactly as first drafted. A skilled business law lawyer will identify the risk allocations hidden in the fine print and negotiate appropriate protections on your behalf.

Case Law: Queen v. Cognos Inc. | 1993 CanLII 146 (SCC) | Supreme Court of Canada

While this landmark Supreme Court of Canada case arose in an employment context, it established the foundational principles of negligent misrepresentation in Canadian contract law – principles that apply directly in business sale transactions. The Court confirmed that a party who negligently makes false representations during pre-contractual negotiations can be held liable for damages even where a formal contract exists. In the context of a business sale, this reinforces the importance of accurate representations during due diligence and in the purchase agreement itself.

One often-overlooked clause is the earn-out arrangement. This is where part of the purchase price is contingent on the business hitting certain financial targets after closing. While earn-outs can help bridge disagreements about valuation, they can also become a source of serious disputes – especially if the seller is no longer in day-to-day control of the business when those targets are being measured.

Common Mistakes Business Owners Make When Selling Their Business

Even smart, experienced business owners make mistakes when navigating a business sale for the first time. Here are the most common ones – and how to avoid them:

1. Going it alone without legal and financial advice. Business acquisitions are complex transactions with significant tax and legal consequences. The money you save by not hiring advisors will almost certainly cost you more in bad deal terms, tax inefficiencies, or post-closing disputes.
2. Sharing confidential information before an NDA is signed. Once information is out, it’s out. A signed confidentiality agreement is the minimum threshold for starting any substantive conversation with a buyer.
3. Accepting the first offer without exploring other options. Even if the first offer seems generous, you have no way of knowing if it’s the best you can get without testing the market. A business broker or M&A advisor can help you run a proper process.
4. Ignoring the tax implications until after the deal is signed. Tax planning needs to happen before the structure is agreed upon. Some tax advantages – like the LCGE – require the business to have met certain criteria for 24 months prior to the sale. Don’t leave this to the last minute.
5. Letting the business performance slip during the sale process. A sale process can take six to eighteen months. If you take your eye off the ball, revenues dip, or key employees leave during this period, the buyer may renegotiate the price or walk away entirely.
6. Underestimating the emotional toll. Selling a business you’ve built is a significant life event. Many owners experience unexpected grief or regret once the deal closes. Think carefully about what comes next – your transition plan matters as much as the closing cheque.
7. Failing to plan for employee transitions. Your employees are often the most valuable part of the business. Buyers will scrutinize key person dependencies. Having employment agreements in place, and thinking through how to retain critical staff through a transition, protects value and employee wellbeing alike.

Frequently Asked Questions

Q: What is the first thing I should do if someone wants to buy my business?

A: Before you begin to respond to any questions, discuss the matter with both a business law attorney and an accountant who specializes in taxes. You need to know your legal responsibilities, what the true value of your company is, and make sure that you are not inadvertently agreeing to anything by signing a confidentiality agreement before the conversation.

Q: Is a verbal offer legally binding?

A: Verbal offers cannot make purchase contracts enforceable according to Canadian law, especially when it comes to purchasing a business. Nevertheless, verbal statements during negotiations may still constitute the grounds for making claims based on misrepresented information if these statements are later found to be untrue and were acted upon by the other party. Always ensure that offers and agreements are put in writing.

Q: Can I sell part of my business?

A: Yes. It is possible for one to sell a share in their company either by selling a minority or majority interest through the sale of partial shares without having to sell off the whole business. This is done where a company’s owner wishes to have a financier or when there is need for business expansion or a staged exit process. Partial sales must be done carefully with the help of a shareholders’ agreement.

Q: What taxes apply when selling a business in Canada?

A: The tax consequences will vary depending on whether the transaction will involve the transfer of an asset or the purchase of stock. In the latter case, where the seller sells stock that qualifies as stock of small businesses corporations, then the gains from such sales can be deducted under the Lifetime Capital Gains Exemption (LCGE), which at present is capped at a maximum of $1.25 million in eligible capital gains on June 25, 2024. In the former case, where the asset is sold, profits are subject to corporate taxes on the disposition of assets, as well as personal tax on dividend income.

Q: Can a buyer back out after making an offer?

A: It depends on the stage of the deal and the documents signed. Before a binding purchase agreement is signed, a buyer can generally walk away – subject to any obligations created by the LOI (such as confidentiality or exclusivity). After a binding purchase agreement is signed, a buyer can only exit if a negotiated condition precedent (such as financing or due diligence approval) has not been satisfied. If the buyer walks away without legal justification, you may have a claim for damages.

Q: What documents are required to sell a business?

A: The primary documents include: (1) a Non-Disclosure Agreement (NDA); (2) a Letter of Intent or term sheet; (3) Due Diligence Data Room (financials, corporate documents, contracts, HR data); (4) a purchase agreement (either an Asset Purchase Agreement or a Share Purchase Agreement); and (5) closing documents (officer certificates, board resolutions, keys). Additional documents may be required depending on the nature of the transaction, such as regulatory approval, consent from the landlord, consent to assignments of contracts, and financing.

Q: How can I maximize the value of my business before selling?

A: Ensure you have clean financials showing growth in profits and income. Make sure your books and legal documents are in order. Lessen the risk of key person risk by developing a strong management team who can manage without you. Try to lock in some long-term customer agreements. Take care of any pending lawsuits or tax issues. Begin preparing yourself at least two to three years prior to selling your company because buyers will appreciate a more professional business that is well organized and documented.