Asset Purchase Agreements in Ontario

An asset purchase agreement is the contract used when a buyer acquires specific assets of a business — rather than the corporate entity that owns them — from a seller. Instead of buying shares in a company, the buyer picks and chooses which pieces of the business it wants: equipment, inventory, customer contracts, intellectual property, goodwill, and so on, while the seller’s corporation continues to exist afterward, typically holding whatever cash or remaining assets weren’t part of the deal.

This structure is common in small and mid-sized business sales in Ontario, particularly where a buyer wants the operating business itself without inheriting the full corporate history — and all the risks that might come with it — of the entity that previously ran it.

Because the agreement needs to describe exactly what’s being bought, what’s being left behind, and on what terms, asset purchase agreements tend to be detailed documents built around carefully drafted schedules rather than general descriptions of “the business.”

The core distinction between an asset purchase and a share purchase comes down to what is actually changing hands. In a share purchase, the buyer acquires the shares of the corporation itself — meaning the company continues exactly as it was, just under new ownership, with all of its existing contracts, debts, employees, and legal history intact. In an asset purchase, the buyer instead acquires specific assets directly, and the selling corporation remains a separate legal entity that the buyer has no ownership stake in.

This difference matters most when it comes to liabilities. In a share purchase, the buyer generally takes on the company as a whole, including liabilities that may not be fully known at the time of closing — unknown tax reassessments, pending claims, or historical obligations, for example. In an asset purchase, liabilities generally don’t transfer automatically; instead, the buyer and seller negotiate exactly which liabilities, if any, the buyer agrees to assume, with everything else remaining the seller’s responsibility.

A well-drafted asset purchase agreement generally attaches a detailed schedule itemizing exactly what’s being purchased — tangible assets like equipment, fixtures, vehicles, and inventory, along with intangible assets such as customer lists, contracts, intellectual property, permits, and goodwill. Goodwill in particular — the value attached to the business’s reputation, customer relationships, and ongoing operations — is often a significant portion of the purchase price, even though it isn’t a physical asset.

The agreement also typically addresses which contracts and leases are being assigned to the buyer, since many such arrangements require the consent of the other party (a landlord or a key supplier, for example) before they can transfer. Identifying which consents are needed, and making them a condition of closing, is a routine but important part of structuring the deal.

Employees are handled differently than in a share purchase. Because the buyer isn’t taking over the seller’s corporation, employees are generally considered terminated by the seller and offered new employment by the buyer on specified terms — a detail that affects whether prior years of service are recognized going forward, and one that deserves its own careful attention in the agreement.

Just as the agreement lists which assets are included, it almost always includes an equally detailed list of excluded assets and excluded liabilities — the things that stay with the seller’s corporation rather than transferring to the buyer. Excluded liabilities commonly include existing litigation, outstanding taxes, undisclosed debts, and obligations under contracts the buyer isn’t assuming.

This is one of the central advantages buyers point to when choosing an asset structure: rather than inheriting a company’s full history, the buyer can negotiate to leave specific risks behind with the seller. That said, this protection isn’t absolute — certain obligations can attach to specific assets regardless of how a deal is structured, such as some statutory liens or employee-related claims, which is why thorough due diligence still matters even in an asset deal.

A clear, mutually understood list of excluded liabilities also protects the seller, since it confirms exactly what obligations the seller remains responsible for after closing — reducing the chance of a later dispute about who was supposed to deal with a particular debt or claim.

Purchase price allocation refers to how the total purchase price is divided across different categories of assets for tax purposes — for example, how much is allocated to inventory, how much to equipment, how much to goodwill, and how much (if anything) to a non-compete covenant from the seller. Because different asset classes receive different tax treatment for both the buyer and the seller, this allocation is frequently a negotiated term rather than a simple administrative detail.

Buyers and sellers sometimes have competing interests in how the price is allocated — a seller might prefer more of the price allocated to goodwill for tax reasons, while a buyer might prefer more allocated to depreciable equipment. The agreement typically fixes the allocation so both parties report the transaction consistently, since mismatched reporting between the buyer and seller can draw unwanted attention.

Because the tax consequences of allocation can be significant, this is an area where involving an accountant alongside legal counsel is common practice, rather than leaving the allocation to be worked out informally after the agreement is signed.

Representations and warranties are statements the seller makes about the business as part of the agreement — for example, that the seller actually owns the assets being sold free of undisclosed liens, that the financial statements provided are accurate, and that there’s no pending litigation the buyer hasn’t been told about. These statements give the buyer a way to verify key facts about the business and, if a statement later turns out to be false, a basis to make a claim against the seller.

Closing conditions set out what must happen before the deal actually completes — obtaining a landlord’s consent to assign a lease, securing third-party consents for key contracts, or confirming that certain employees remain with the business, for instance. A fully negotiated and signed agreement can still fail to close if an important condition isn’t satisfied, which is why these conditions are drafted with as much care as the commercial terms of the deal.

It’s also common for the agreement to include indemnity provisions, requiring the seller to compensate the buyer for losses arising from a breach of a representation or warranty discovered after closing, often subject to time limits and dollar caps negotiated between the parties.

Whether buying or selling, reading the full agreement — not just the purchase price and closing date — is worth the time it takes. The asset list, the excluded liabilities list, the representations and warranties, and the closing conditions are generally where the real risk allocation of the deal lives, even though the headline number tends to get the most attention.

Our hub on agreements in Ontario covers other contract types that often come up alongside a business purchase, and our contract review checklist walks through categories worth checking before signing any significant agreement.

This article is general information about how asset purchase agreements commonly work in Ontario and isn’t legal advice for a specific transaction. Business purchases vary widely in complexity, and the right structure and terms depend heavily on the particular business and circumstances involved.