Current to July 24, 2026
An asset purchase agreement, or APA, is the contract that spells out exactly what a buyer is buying, what liabilities it is taking on, and what stays behind with the seller.
- It lists the purchased assets and the excluded assets, in detail.
- It defines assumed liabilities and excluded liabilities, which matter just as much as the price.
- It sets the price, how the price is allocated for tax purposes, and how it adjusts before or after closing.
- It covers HST, employees, contracts, permits, liens, and what happens if something turns out to be wrong.
For buyers, the value of an asset deal is choice and control. For sellers, the challenge is delivering a working business without leaving open-ended risk behind after closing.
- Buyers often like asset deals because they can pick the assets they want and limit which liabilities come with them.
- Sellers need the purchased-asset list and the excluded-asset list to be precise. A vague list creates fights after closing.
- The wording around excluded liabilities matters just as much as the purchase price itself.
- How the price is allocated across asset types changes the tax result for both sides. It is never just paperwork.
- Working capital adjustments can move the final price by a real amount, even after the deal has already closed.
- HST on a business sale can sometimes be deferred through a proper election under the Excise Tax Act, but only if the legal conditions are actually met.
- Employee issues do not disappear just because the deal is structured as an asset sale.
- Contracts, leases, permits, and lien searches often decide whether the buyer gets a working business, or just a pile of equipment.
Price Is the Headline. It Isn't the Deal.
Most business owners look at price first. That makes sense. But in an asset deal, price is only the headline. The real negotiation is about what is actually being handed over, what is being left behind, and what happens if the business on closing day is not quite the business the buyer thought it was buying.
That is why the asset purchase agreement matters so much. It is not simply the document that puts a deal on paper. It is the document that turns a shared understanding into a legally enforceable transfer plan.
For a buyer, an APA is usually about buying the operating value of a business while keeping old risk under control. For a seller, it is about getting paid, keeping certainty, and not staying economically tied to the business long after the sale closes.
Asset Purchase Snapshot
| Topic | Buyer Focus | Seller Focus |
|---|---|---|
| Purchased vs. excluded assets | Get everything needed to run the business on day one | Avoid accidentally handing over non-business or retained property |
| Assumed vs. excluded liabilities | Limit obligations to clearly named items | Stop the buyer from re-labelling ordinary operating costs as excluded |
| Price and allocation | Maximize tax basis, avoid overpaying | Get a fair tax result for the sale |
| Working capital | Make sure the business arrives with normal cash flow | Avoid a formula that favours the buyer |
| Contracts, employees, permits | Keep the business running without a gap | Avoid lingering responsibility after the transfer |
| Reps, warranties, indemnities | Keep recourse if facts turn out to be wrong | Cap and contain exposure after closing |
What an APA Actually Does
An asset purchase agreement usually does five things at once. It defines exactly which assets are being sold. It allocates liabilities between buyer and seller. It sets the price and the adjustment mechanics. It creates the closing conditions and the delivery checklist. And it allocates post-closing risk through the representations, covenants, and indemnities.
Leave any one of those five pieces thin, and the deal might close fine, but trouble usually follows.
Purchased Assets and Excluded Assets
This is the first place where business owners tend to oversimplify. Saying "we're selling the business" is not enough on its own. The agreement needs a detailed schedule that spells out exactly what "the business" means.
Typical purchased assets include equipment, inventory, accounts receivable if included, intellectual property, goodwill, phone numbers, websites and branding, assignable contracts, books and records, and prepaid expenses where negotiated.
Typical excluded assets may include cash, tax refunds, insurance proceeds, certain receivables, shareholder loans, minute books the seller must keep, personal vehicles or other non-operating assets, and anything the seller wants to carve out before closing.
What the Buyer Should Ask
Ask a blunt, practical question: if the wires go out and the deal closes tomorrow, do I have everything I need to actually run this business on Monday morning? If the answer is no, the purchased-assets list is incomplete.
What the Seller Should Watch For
Resist broad catch-all wording if you intend to keep anything of value. If you are keeping certain receivables, software, deposits, rebates, or equipment, the exclusion has to be spelled out clearly, not implied.
If the seller corporation is disposing of all or substantially all of its property, corporate approval requirements can arise under section 184(3) of the Business Corporations Act.[1] That issue often gets treated as internal housekeeping right up until it isn't. A buyer should require the seller's corporate resolutions authorizing the sale, along with proof the seller actually has the authority to sign the deal and convey the assets. Those documents should be on the closing checklist from the start, alongside the other closing deliverables, not chased down at the last minute. A seller should get that approval process handled early, not the day before closing.
We had a client who thought he was buying a small HVAC company as a going concern. The purchase price assumed two branded service vans came with the business. The draft agreement referred generally to "all equipment used in the business," but a schedule buried deep in the appendix quietly carved out any vehicle leased personally by the owner rather than by the corporation.
Our client caught it three days before closing, after he had already lined up staff schedules and customer calls for the following week. We fixed it, but it cost time we did not have. We amended the asset list, adjusted the price slightly to reflect the vans, and made delivery of the lease-assignment paperwork a condition of closing. The lesson stuck with him: an owner thinks in terms of "the business." A purchase agreement tells a story that only deals in specifics.
Assumed Liabilities and Excluded Liabilities
This is where buyers usually feel safest in an asset deal, and sometimes feel a little too safe.
In principle, the buyer agrees to take on only specified liabilities. These often include trade payables from the ordinary course of business after a stated date, obligations under contracts that are formally assigned, warranty work tied to post-closing operations, and any liabilities expressly scheduled in the agreement.
Excluded liabilities often include pre-closing tax debts, lawsuits, shareholder or related-party debts, pre-closing payroll obligations, unbooked liabilities, fines and penalties, and any debt not specifically assumed.
That structure is attractive, but it is not magic. Some obligations can still follow a business by statute, by common law, or simply because of how the transition is carried out.
Take employment. Ontario law can preserve an employee's years of service even in an asset sale. Under section 9(1) of the Employment Standards Act, 2000, if a business or part of a business is sold and the employee ends up working for the buyer, that employment is deemed not to have ended for the purposes of the Act.[2] An APA can allocate responsibility between the buyer and seller, but it cannot simply write away rights the statute already protects.
What the Buyer Should Do
Define assumed liabilities in positive terms, naming exactly what is included. Do not rely on broad implication.
What the Seller Should Do
Make sure the ordinary operating obligations needed to run the business are not defined so narrowly that the buyer later claims the seller was supposed to keep them.
Purchase Price and Allocation
The APA should state the price, how it gets paid, and how it is allocated across different types of assets.
The price may include a cash payment at closing, a holdback or escrow, a vendor take-back note, an earnout, working capital adjustments, debt-like item adjustments, and separate payments for consulting, transition help, or a non-compete promise.
The allocation matters because an asset sale is usually not taxed the same way across every category. Inventory, depreciable property, goodwill, and payments for restrictive covenants can all produce different tax results.
What the Buyer Should Push For
Typically, buyers want more of the price allocated to depreciable assets and inventory. But buyers should always confirm the allocation with their accountant before finalizing it.
What the Seller Should Push For
Sellers should review the allocation with an accountant before agreeing to it, since a "business" price can produce very different after-tax outcomes depending on how it is split. An allocation left to "the accountants will sort it out later" is an open invitation to friction.
Working Capital and the Post-Closing True-Up
Many owners assume the price is locked in the moment the APA is signed. Often, it is not.
Where a deal includes a working capital adjustment, the price assumes the business will be delivered with a normal level of day-to-day operating assets and liabilities. If it comes in short of that target, the buyer may pay less. If it comes in above target, the seller may get more.
A good APA should spell out the target working capital, the calculation method, which accounts are included or excluded, the accounting rules that apply, an estimated closing statement, a final post-closing statement, a window to object, a way to resolve disputes, and when payment is due.
What the Buyer Should Insist On
Insist on a definition that stops double-counting between working capital, debt, and cash adjustments.
What the Seller Should Do
Test the formula against historical numbers before signing. A flawed formula can produce a bad result even when the business itself is performing normally. The true-up clause looks technical, but it is really a delayed price clause.
HST and the Section 167 Election
Ontario business owners often ask whether HST applies to an asset sale. The default answer is yes, unless the parties meet the criteria to elect to defer it under the Excise Tax Act, which is often the case.
Where the legal conditions are met, the parties may jointly elect under section 167(1) of the Excise Tax Act so that no tax is payable on the supply of a business or part of a business.[3] That result is not automatic. It only applies where the buyer acquires ownership, possession, or use of all or substantially all of the property reasonably needed to carry on the business, and other conditions apply too. Section 167(1.1) deals with situations involving real property and registrant requirements within that election structure.[4]
What the Buyer Should Confirm
Do not assume the election works simply because everyone is calling it a business sale. Confirm the asset package and the filing steps with your accountant.
What the Seller Should Do
If the election is expected, make it a clear closing deliverable. An unexpected HST bill can become a serious cash-flow problem fast.
We had a buyer client who closed the purchase of a small manufacturing business and assumed, because everyone had been calling it a "business sale," that the section 167 election would automatically apply and no HST would be payable. Nobody had actually confirmed whether the asset package met the legal test of transferring all or substantially all of the property needed to carry on the business.
It turned out the seller had kept back a financed piece of equipment central to production, planning to sell it separately. That single exclusion put the election at risk. We caught it during our closing review, restructured the deal so the equipment financing was assigned alongside everything else, and confirmed the election was properly filed before the money moved. Had it gone unnoticed, our client could have faced an HST bill worth tens of thousands of dollars that nobody had budgeted for.
Employees
Asset deals often create false confidence around employees. Owners sometimes say, "It's an asset sale, so the buyer can just hire whoever it wants." It's not that simple.
Yes, a buyer can choose which employees to offer jobs to. But that choice does not erase every legal obligation tied to those employees. The timing and wording of job offers, how terminations are handled, continuing benefits, accrued vacation pay, severance exposure, and common-law notice obligations can all follow the employee into the new relationship, regardless of how the deal is structured. Ontario law adds another layer: under section 9(1) of the Employment Standards Act, 2000, if an employee ends up working for the buyer after the sale, that employment may be treated as continuous for ESA purposes, even though the employer has changed.[2]
What the Buyer Should Decide Early
Decide which employees are essential, who gets an offer, and what liabilities the seller has to clear up at or before closing.
What the Seller Should Avoid
Do not leave employment allocation to a vague conversation on closing day. Address it explicitly in the APA, and coordinate it with the actual offer letters and terminations.
Contracts, Leases, Assignments, and Permits
An asset sale often has additional steps than a share purchase when it comes to assigning contracts, leases, and permits. In a share sale, the corporation itself does not change hands, so its contracts, leases, and permits usually stay in place automatically, unless the agreements contain change-of-control termination provisions. In an asset sale, each one has to be individually moved from the seller to the buyer, and they do not all move the same way. Some contracts can simply be assigned. Others require the other party's consent before they can move at all. Leases usually need the landlord's approval. Customer contracts sometimes include change-of-control restrictions or termination rights that get triggered by the sale itself. Some permits transfer along with the business. Others do not transfer at all, and the buyer has to apply for a new one from scratch.
Getting the deal actually done, in practice, often depends more on sorting out these transfers than on how well the agreement is written. The parties need to carefully chart every contract, lease, and permit early, and map out exactly what each one requires to transfer, whether that is a signature, a consent, a landlord's approval, or a fresh application. Leaving that work until closing week is one of the most common ways an otherwise solid asset deal gets delayed.
What the Buyer Should Do
Identify the mission-critical contracts and permits early, and make the important ones a condition of closing. It's critical that the buyer has all the rights and abilities the business needs to begin operating the day after closing.
What the Seller Should Do
Avoid making absolute promises that every consent will come through, unless you can actually control that outcome. Use reasonable-efforts language where it fits, but be clear about which consents are truly deal-critical.
PPSA Searches, Lien Discharges, and Payouts
One of the most important jobs of an APA is making sure the buyer receives assets free of unwanted security interests, other than the ones both sides agreed to accept.
In Ontario, that starts with careful searches under the Personal Property Security Act. If a security interest is not properly registered, the law can push it behind certain other claims, under section 20(1)(a).[5] In some cases, an unregistered security interest may not bind a buyer at all, if the buyer pays value for the assets and does not know about the security interest, in accordance with sections 20(1)(c) and (d).[5] None of this means a buyer can skip the paperwork and hope the statute sorts everything out. Registry searches, checking the seller's exact legal name, reviewing the collateral, getting payout letters, and confirming discharges all still matter.
Priority rules matter too. Under section 28, a buyer of goods in the ordinary course of business can sometimes take those goods free of a security interest created by the seller, but that rule is not a general cure-all for a business acquisition.[6]
What the Buyer Should Require
Do not stop at "the seller says the bank will be paid out." Require the actual payout letter and the discharge document.
What the Seller Should Do
Line up cooperation from secured creditors early. A closing can stall fast if discharge paperwork gets treated as a last-minute detail.
We had a client buying the equipment and inventory of a manufacturing business. The seller had one operating line of credit and one separate equipment loan, both with the same bank. Everyone assumed both registrations would clear once the closing funds paid out the operating debt. Only one payout letter had actually been requested.
After closing, our client discovered a registration still sitting against equipment he thought he owned free and clear. It was fixable, but it ate up weeks of time, legal fees, and back-and-forth with the lender that a matched checklist would have avoided entirely. Now we treat this as standard practice on every asset deal: match every single registration to its underlying loan, one by one, before we let a client sign off on closing. A payout is not the same thing as a discharge plan.
Representations and Warranties
Representations and warranties are one of the most important parts of an asset purchase agreement. They are the seller's factual promises about the business and the assets being sold. They give the buyer a written set of statements it can rely on when deciding whether to sign, close, and pay the purchase price. If a representation turns out to be false, the buyer may have a claim for breach of the agreement. That claim is still subject to the survival periods, baskets, caps, exclusions, and other limits worked out in the indemnity section.
In an asset sale, representations and warranties usually do two jobs. First, they push the seller to disclose problems before closing, through the disclosure schedules. Second, they decide who carries the risk if a problem exists but was never properly disclosed. Common topics include the seller's authority to complete the deal, ownership and condition of the purchased assets, financial statements, undisclosed liabilities, taxes, lawsuits, material contracts, employees, compliance with the law, intellectual property, privacy and cybersecurity, environmental matters, permits and licences, and whether the assets being sold are enough to run the business after closing.
Buyers usually want these promises to be broad, detailed, and backed by a real remedy. No buyer wants to find out after closing that a key asset was leased instead of owned, that a major customer contract needed consent, that the inventory was outdated, that taxes went unpaid, or that the assets being transferred are not enough to run the business the way it was described. Sellers, on the other hand, usually try to narrow these promises. They add knowledge qualifiers, materiality thresholds, time limits, disclosure schedules, and specific exclusions. At its core, this negotiation is about who carries the risk for facts that are unknown, partly known, or hard to check before closing.
Because of this, the representations should always be read together with the disclosure schedules and the indemnity section. A strong promise only matters if it lasts long enough for a problem to surface, and if the buyer has a real way to collect when it does.
What the Buyer Should Focus On
These clauses should match the real risks that came up during due diligence. If the business depends heavily on a permit, a top customer, a software system, or a specific piece of equipment, the representations should say so directly.
What the Seller Should Avoid
Avoid giving flat, unqualified promises where a knowledge qualifier, a materiality threshold, or a disclosure schedule would be more accurate. In Bhasin v Hrynew, the Supreme Court of Canada recognized good faith as an organizing principle of Canadian contract law, and confirmed that parties have a duty of honest performance. That means they must not lie to each other, or knowingly mislead each other, about how the contract is being carried out.[7] That does not turn every disagreement into a good-faith claim, but it reinforces why accurate disclosure and straightforward conduct matter once the parties are relying on each other to get to closing.
Covenants
Covenants are promises about what each side has to do, before and after closing. Common examples include operating in the ordinary course before closing, keeping employees, customers, and suppliers on side, obtaining consents, giving access to records, respecting non-competition and non-solicitation terms, keeping information confidential, providing transition support, cooperating on tax matters, and helping with receivables or vendor relationships.
What the Buyer Should Rely On
Ordinary-course covenants help make sure the business does not materially change between signing and closing.
What the Seller Should Insist On
Transition covenants should be clear, time-limited, and paid for where the seller is expected to give meaningful help after closing.
Indemnities
Indemnities answer the question every business owner eventually asks once a problem shows up: who actually pays for this? If representations and warranties are the seller's factual promises, the indemnity section is what makes those promises enforceable. It says whether the buyer can get money back for a false representation, a broken covenant, an excluded liability, a tax problem, an employee claim, a lawsuit, an environmental issue, an unpaid supplier, or any other risk from before closing that shows up after closing.
A well-drafted indemnity section needs to cover two things: the claims process, and the dollar limits. The claims process covers how notice has to be given, what that notice has to say, who controls the defence of a claim brought by someone outside the deal, who has to agree before a claim is settled, and how the parties are expected to cooperate along the way. The dollar limits cover how long the promise lasts, baskets and deductibles, a minimum threshold before small claims count at all, dollar caps, exclusions, and carve-outs for fraud, intentional wrongdoing, tax issues, or the most fundamental promises. These details decide whether the protection is real, or just words on a page.
Indemnities also need to work together with the rest of the agreement. If due diligence turns up a known problem, it can be handled with its own specific indemnity. Insurance, tax benefits, efforts to reduce the loss, escrows, holdbacks, rights to deduct money owed, and price adjustments should all line up too, so the buyer never gets paid twice for the same problem and nothing falls through the cracks. This is one of the most heavily negotiated parts of the whole agreement, because it decides how clean the seller's exit really is, and how protected the buyer actually is.
What the Buyer Should Prefer
Specific indemnities usually work better than broad, general language. If due diligence turns up a known issue, solve it with targeted drafting rather than a vague promise.
What the Seller Should Insist On
Insist on clear time limits and dollar limits. An open-ended indemnity can quietly turn a completed sale into years of uncertainty.
We had a seller client who was ready to sign an APA that indemnified the buyer for "any and all liabilities relating to the business, known or unknown, for an unlimited period." Our client was retiring and wanted the deal done. He nearly signed it without reading past the price.
We stepped in and rewrote the section. We tied the indemnity to specific, defined categories, added a reasonable survival period for ordinary claims, kept a longer window only for fundamental issues like title and tax, and added a dollar cap tied to a portion of the purchase price. The buyer still got real protection for the risks that actually mattered. Our client got to retire without an open file hanging over him indefinitely. That is the difference between an indemnity clause that protects a buyer, and one that quietly turns a seller into an unpaid insurance company.
Closing Deliveries
A good APA should have a closing checklist built right into it. Typical deliveries include bills of sale, assignments and assumptions, officer certificates, corporate approvals, third-party consents, resignations, employment documents, restrictive covenant agreements, escrow agreements, transition services agreements, payout letters, discharge documentation, tax election forms, and the keys, passwords, and access credentials the buyer actually needs.
The more operationally specific the business, the more this closing package matters.
Transition Obligations
Many asset deals succeed or fail in the first thirty to ninety days after closing. That is why transition obligations deserve more attention than they usually get.
Typical transition items include introductions to key customers and suppliers, transferring phone numbers, domain names, and social media accounts, help with software or bookkeeping systems, support collecting receivables, training, help migrating permits, inventory counts, and continued access to records after closing.
What the Buyer Should Do
If the seller's know-how is part of the value being paid for, make the support obligation concrete and specific.
What the Seller Should Do
Define the scope, the length, and the availability of any help carefully, so that "helping out after closing" does not turn into unpaid consulting with no end date.
Five Common Mistakes
- “If the assets aren't listed properly, you may end up buying less business than you thought.”
- “Excluded liabilities matter just as much as the assets everyone is excited about.”
- “A tax allocation schedule is never just boilerplate.”
- “Paying out a loan is not the same thing as clearing the PPSA registration against it.”
- “If transition obligations are left vague, post-closing frustration is predictable.”
Ontario FAQs
Usually selectivity. The buyer can choose which assets it wants and which liabilities it is prepared to take on, instead of automatically stepping into a corporation with its full history.
No. It reduces risk but does not remove every category of exposure. Employment, tax, and regulatory obligations may still require careful drafting and separate legal advice.
Not always. If the statutory conditions are met, the parties may be able to jointly elect under section 167(1) of the Excise Tax Act, but the conditions and paperwork need careful review.[3]
Because the buyer wants the assets free of unplanned security interests. Searches, payout letters, and discharges confirm whether a lender or other secured party still has a claim on the assets being sold.
Often it is not the headline purchase price. It is the working capital true-up, a missed consent, an overbroad indemnity claim, or a disagreement over whether the business delivered actually matched what the agreement promised.
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This article gives general information for Ontario business owners, current to July 24, 2026. It is not legal or tax advice, and it does not create a lawyer-client relationship. Asset purchase agreements are highly deal-specific. Legal, tax, employment, and regulatory consequences depend on the business, the assets, the liabilities, the parties, and the deal structure. Get legal advice for your specific situation before signing, closing, or relying on any asset purchase agreement.
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