“We’ve agreed on the price. Now the lawyers just need to finish the paperwork.”

At this stage, a good portion of the negotiation may still be ahead of you. How much will be paid at closing? What amount will remain to be received? Under what circumstances will the buyer be able to claim a refund? How long will the seller need to remain available?

The answers can significantly change the value of an offer. A higher price, but one payable over several years and subject to conditions that are difficult to achieve, does not produce the same result as an amount paid at closing.

The purchase agreement serves to translate the understanding into precise obligations. It also determines who assumes the risks when things do not go as planned.

This guide is intended for SME owners who are selling and for successors who are buying in Quebec. It presents the main points to discuss with your advisors before signing.

Summary response: the clauses to negotiate during a business sale concern the price and its adjustments, payment terms, representations and warranties, indemnification, closing conditions, and post-sale obligations. Examine them together: a concession on price may lose its value if it is accompanied by overly broad liability, uncertain payment, or a poorly defined transition.

The price: how much will be paid, when, and under what conditions?

The stated amount is not enough to compare two offers. You must understand how it will be calculated and paid.

Ask for a simple presentation that distinguishes:

• the amount payable at closing;

• the vendor take-back (VTB) loan;

• the earn-out, if any;

• temporarily held-back funds;

• adjustments that could increase or decrease the price.

Distinguishing the amounts to be received

A vendor take-back (VTB) loan is a portion of the price that the seller agrees to receive later, according to the agreed-upon terms. The seller then becomes a creditor.

A conditional payment, often called an earn-out, depends on future results or events defined in the agreement. It can, for example, be linked to sales for a given period.

A holdback keeps a portion of the price in reserve for a specific reason, such as guaranteeing certain obligations of the seller. It must be determined who holds the money, under what circumstances it can be used, and when the balance will be released.

These mechanisms serve different needs. For each one, ask: “What could prevent me from receiving this sum, or force me to pay it?”

To delve deeper into seller financing, consult our article on the vendor take-back loan.

Anticipating price adjustments

The price may be established based on a financial situation that will evolve until closing. The parties must therefore specify the applicable adjustments.

Working capital deserves special attention. The buyer wants to take over a business that has the necessary resources to continue its activities. The seller wants to know what they must leave in the business and what they will be able to withdraw.

BDC identifies working capital adjustments as one of the points to negotiate during a sale. BDC — Negotiating the sale of your business.

Suppose, in a simplified example, that the parties agree on a target working capital of $300,000. If the amount calculated at closing is $260,000, a downward adjustment of $40,000 could apply depending on the negotiated formula.

However, there must be agreement on the calculation: which accounts are included? How are bad debts and obsolete inventory treated? Who prepares the figures? What deadline is granted to contest them?

Tip: apply the formula to real figures before signing. A numerical example can reveal a disagreement that the drafting alone does not show.

If part of the price depends on future results

A conditional payment requires more than just a sales or profit target.

Also discuss decisions that could influence the result: allocation of expenses, price changes, transferring clients to another company, or downsizing an activity.

Specify the information to which the seller will have access and the mechanism provided in case of disagreement on the calculation. Otherwise, they could be waiting for a payment whose conditions they cannot verify.

Representations and warranties: what is the seller asserting?

In the agreement, the seller usually provides representations regarding the business. They may concern finances, assets, contracts, employees, taxes, litigation, or intellectual property.

These representations help define what the buyer believes they are acquiring and the risks the seller agrees to assume. Lavery’s guide on business succession explains their link to the indemnification mechanism provided for in the agreement.

For the seller, each assertion deserves careful reading. Can you confirm it? What information are you relying on? Is there an exception?

For the buyer, the question is different: does this representation cover an issue important to the acquisition?

Documenting exceptions

Take a fictional case. The agreement states that no major client has announced an intention to terminate the relationship. Yet, a few weeks earlier, a client had sent a notice of non-renewal.

This information must be brought to the advisors' attention and it must be determined how to handle it in the agreement. Disclosure schedules are used specifically to specify exceptions to representations.

Do not assume that a document filed somewhere in the due diligence folder automatically constitutes sufficient disclosure within the meaning of the contract. Have the manner in which exceptions must be presented confirmed.

Specifying the scope of assertions

Certain representations may be limited to the knowledge of identified persons. Others may be formulated without this reservation.

If a clause contains “to the seller’s knowledge,” ask what that means in your agreement: who are we talking about and what checks must this person have performed?

Keep in mind: a general representation can commit the seller to much more than they had in mind. Have it explained based on the actual activities of your business.

Indemnification: who pays if a problem arises after the sale?

The indemnification clause describes the situations in which one party may ask the other to bear a loss.

It must be read in conjunction with the representations and warranties, the disclosed exceptions, and the other provided remedies. A liability discovered after the sale does not automatically become an invoice to be sent to the seller.

The negotiation may specifically cover covered events, deadlines, thresholds, caps, and the claims procedure.

Understanding thresholds and caps

A threshold can avoid treating every small discrepancy as a claim. But its functioning must be clear.

Here is a purely illustrative example. The parties set a threshold of $20,000 and the eligible losses total $30,000.

Depending on the chosen formula, the indemnification could apply to:

• only the $10,000 exceeding the threshold;

• or the full $30,000 as soon as the threshold is crossed.

A cap can also limit certain claims. However, its exceptions must be examined: not all obligations are necessarily subject to the same limits. Thresholds, caps, and time limits are among the protections to negotiate, as explained in this presentation published by the Chambre de commerce et de l’industrie du Haut-Richelieu. CCIHR — Representations, warranties, and indemnification.

The amounts in the example are not market standards. They serve to show why the mechanism matters as much as the figure.

Providing for how a claim will be handled

Before signing, ask your advisors to explain the process of a claim:

• How must it be announced?

• What information must accompany the notice?

• Who responds when a third party sues the company?

• Who can accept a settlement?

• What happens if the amount is contested?

Also ask if the buyer will be able to withhold an amount from the vendor take-back loan. This possibility, when provided for, must be coordinated with the payment terms and the handling of disagreements.

A useful question for the seller: “After closing, in what situations could I have to pay back money, and what limits would apply?”

Closing conditions: what must be settled before the sale?

Signing an offer does not necessarily mean the transaction will be completed.

Depending on the agreement, several conditions may remain to be met: financing, due diligence, landlord consent, third-party authorization, or delivery of specific documents.

For each condition, clarify who is responsible, the deadline, and how to confirm it is met. Also specify the consequences if it is not.

Making the financing condition concrete

The mention “subject to financing” leaves several questions open.

What amount is the buyer seeking? By what date? What steps must they take? What happens if the bank approves a loan but imposes conditions that the buyer does not want to accept?

These points must be discussed while the parties still have time to find a solution.

Organizing due diligence

The buyer must be able to examine the information necessary for their decision. The seller needs to know what will be requested, who will have access to it, and how long the review will last.

BDC recommends, among other things, studying finances, working capital, and major contracts during due diligence. BDC — Verifying a business before buying it.

Establish a calendar for requests and responses. Specify how issues raised will be handled: correction, negotiation of specific protection, agreed amendment of the agreement, or other consequences provided for in the contract.

Managing the business between signing and closing

If several weeks separate these two moments, the business continues to operate.

Discuss the decisions that will require agreement: exceptional dividend, major purchase, new debt, or modification of a major contract, for example.

The buyer wishes to preserve what they are about to acquire. The seller must retain enough latitude to manage daily operations.

The transition: how long will the seller remain involved?

“I’ll be available if needed” seems generous. It could also mean two hours a week for the seller and a daily presence for the buyer.

The transition is better described as a work mandate.

Specify:

• its duration;

• the planned hours or days;

• presence on-site or remote;

• the tasks to be performed;

• remuneration and expenses;

• the person who decides priorities;

• the terms of any potential extension.

The tasks can be very concrete: introducing key clients, training the submission manager, documenting certain processes, or assisting with a major renewal.

Clarifying who makes the decisions

A former owner who continues to give instructions can complicate the handover of the business.

Agree on their authority after the sale. Can they approve a price, promise a deadline to a client, or incur an expense? To whom must they forward requests?

If the seller becomes an employee or consultant, coordinate this agreement with the purchase agreement. The obligations related to the sale and those related to work after closing must be understood separately.

Confidentiality, non-competition, and non-solicitation

These clauses protect different interests.

Confidentiality governs the use and communication of sensitive information. Non-competition targets certain competing activities. Non-solicitation can target approaches to clients or employees, depending on its drafting.

Protecting information from the start of discussions

Confidentiality is handled before the sale, as soon as parties exchange sensitive information. Lavery recommends framing these exchanges at the beginning of the process. Lavery — Preparing a business transfer.

Specify the persons authorized to receive information, permitted uses, and the fate of documents if the transaction fails. Also agree on who will be able to announce the sale and when.

Adapting restrictions to the activities sold

A non-competition clause must be examined according to the activities targeted, its duration, its territory, and the context of the transaction.

In Quebec, the analysis of a restriction negotiated in a business sale differs from that applicable in an employment context. The Supreme Court explained this distinction in the Payette v. Guay inc. decision. The fact that the seller subsequently works for the buyer is not enough, on its own, to transform an obligation related to the sale into an employment clause. Supreme Court of Canada — Payette v. Guay inc., 2013 SCC 45.

Do not, therefore, copy a duration or territory from another transaction assuming they will be suitable for yours.

Talking about the seller’s plans

The seller should explain what they intend to do after the sale: retire, offer consulting services, invest in another business, or help a family member.

These plans make it possible to identify conflicts before signing. Have the permitted activities and applicable restrictions specified, including for non-solicitation.

Risks to look at on each side

An example: two offers that do not yield the same result

Let’s take the fictional case of an owner who receives two offers for her SME.

Offer B shows a higher total, but a larger portion of the price remains to be received. One must examine the conditions of the $400,000 payment, the guarantees on the vendor take-back, and the work expected during the transition.

Indemnification limits and price adjustments could also change the comparison.

To choose, the owner must look at the amount she will receive immediately, the uncertain sums, the obligations she will retain, and her own plans after the sale. The stated price does not answer all these questions.

What to prepare before negotiating the agreement?

Come with your priorities and the information that will allow you to discuss them:

• desired amount at closing;

• tolerance for deferred payment;

• assumptions for calculating the price;

• known problems to disclose;

• significant contracts and consents;

• intended role for the seller after the sale;

• future projects that could be affected by restrictions;

• desired timeline;

• points on which you need an explanation.

Then, ask your advisors to present the main financial consequences of the agreement to you. For complex clauses, use scenarios: a client leaves, a liability appears, financing is delayed, or the seller has to interrupt their transition.

Errors that complicate negotiations

Focusing solely on price. The payment schedule, adjustments, and post-sale responsibilities influence what each party actually receives.

Treating appendices as paperwork. They may contain the exceptions and information necessary to understand the scope of the representations.

Accepting a calculation without testing it. Create an example using your numbers for working capital, the conditional payment, and claim thresholds.

Leaving the transition vague. Specify tasks, availability, and compensation.

Postponing disagreements until closing. An important point deserves a decision while the parties still have time to negotiate.

Signing without understanding future restrictions. Verify how they would apply to the seller’s actual future plans.

Frequently asked questions

Which clauses are the most important in a business sale?

Payment, price adjustments, representations and warranties, indemnification, closing conditions, and post-sale obligations deserve particular attention. Their relative importance depends on the risks specific to the business.

Can the price change after the offer?

Yes, depending on the mechanisms provided and the modifications agreed upon by the parties. One must distinguish an adjustment calculated according to an already accepted formula from a new price negotiation.

Is the seller responsible for every problem discovered after the sale?

Not automatically. One must examine the agreement, the nature of the problem, the representations given, the exceptions, and the applicable rules. The indemnification clause must be understood before signing.

Does the seller have to remain after closing?

No. This depends on the needs of the transition and the agreement. When support is planned, its duration and content should be defined.

Is a non-compete clause always valid?

No. Its validity and scope depend on how it is drafted and the context. A clause negotiated in a business sale must be analyzed in relation to that transaction.

Can a standard purchase agreement template be used?

A template can help identify topics to discuss. However, it must be adapted to the structure of the sale, the financing, and the risks of the case. Have the agreement and its appendices reviewed by a lawyer who is familiar with business transactions.

To prepare for the entire process, consult the ultimate guide to selling a business.

This article provides general information and does not constitute legal, tax, or financial advice. Have your advisors validate the clauses and their consequences based on the structure and specific features of your transaction.