“We’ve agreed on the price. Now the lawyers just need to finalize 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 can the buyer 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 that is payable over several years and subject to difficult-to-attain conditions does not yield 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 selling their business and successors buying one in Quebec. It presents the main points to discuss with your advisors before signing.

Executive summary: the clauses to be negotiated 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 announced amount is not enough to compare two offers. You must understand how it will be calculated and paid.

Ask for a simple breakdown that distinguishes:

• the amount payable at closing;

• the vendor take-back (balance of sale price);

• the conditional payment (earn-out), if applicable;

• temporarily held-back sums;

• adjustments that could increase or reduce the price.

Distinguishing the amounts to be received

A vendor take-back (balance of sale price) is a portion of the price that the seller agrees to receive later, according to 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 may, for example, be linked to sales over a given period.

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

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

To learn more about vendor financing, consult our article on the vendor take-back.

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 operations. The seller wants to know what must be left in the business and what they will be able to withdraw.

BDC identifies working capital adjustments as one of the key 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 according to the negotiated formula.

However, you must agree 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 the decisions that could influence the result: allocation of expenses, price changes, transfer of clients to another company, or reduction of 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 does the seller affirm?

In the agreement, the seller usually makes representations about the business. These may cover 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 in the agreement.

For the seller, each affirmation 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 that is important for the acquisition?

Documenting exceptions

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

This information must be brought to the attention of advisors and determined how it will be handled in the agreement. Disclosure schedules are used in particular 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 affirmations

Some 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 verifications must this person have performed?

Remember: a general representation can commit the seller to much more than they had in mind. Have it explained based on your company’s actual activities.

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 alongside the representations and warranties, the disclosed exceptions, and other provided remedies. A liability discovered after the sale does not automatically become an invoice to be sent to the seller.

Negotiation may focus on the events covered, timeframes, thresholds, caps, and the claim procedure.

Understanding thresholds and caps

A threshold can avoid treating every small discrepancy as a claim. But its operation 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 that exceeds the threshold;

• or the entire $30,000 once 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 Chamber of Commerce and Industry of 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.

Foreseeing how a claim will be handled

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

• How must it be announced?

• What information must accompany the notice?

• Who responds when a third party sues the business?

• 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. This possibility, when provided for, must be coordinated with payment terms and the handling of disagreements.

A useful question for the seller: “After closing, in what situations could I have to pay money back, 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, consent from a landlord, authorization from a third party, 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 the finances, working capital, and major contracts during due diligence. BDC — Verifying a business before buying it.

Provide a schedule for requests and responses. Specify how raised issues will be handled: correction, negotiation of special protection, agreed-upon modification of the agreement, or other consequence provided in the contract.

Managing the business between signature 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 wants to preserve what they are about to acquire. The seller must retain enough latitude to manage day-to-day operations.

The transition: how long will the seller remain involved?

“I’ll be available as needed” sounds generous. It can 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;

• on-site or remote presence;

• the tasks to be accomplished;

• the compensation and expenses;

• the person who decides on priorities;

• the terms for a possible extension.

Tasks can be very concrete: introducing key clients, training the head of tenders, 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 taking over 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 should they forward requests?

If the seller becomes an employee or consultant, have this agreement coordinated with the purchase agreement. 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 wording.

Protecting information from the start of discussions

Confidentiality is handled before the sale, as soon as the 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 sold activities

A non-competition clause must be examined based on the targeted activities, its duration, 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. judgment. The fact that the seller subsequently works for the buyer is not enough, by itself, to transform an obligation related to the sale into an employment clause. Supreme Court of Canada — Payette v. Guay inc., 2013 SCC 45.

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

Discussing the seller’s plans

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

These plans allow for identifying conflicts before signing. Have the permitted activities and applicable restrictions specified, including for non-solicitation.

The risks to watch 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 amount, but a larger portion of the price remains to be received. You must examine the conditions for the $400,000 payment, the guarantees on the vendor take-back loan, 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 of these questions.

What should you prepare before negotiating the agreement?

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

• desired amount at closing;

• tolerance for deferred payment;

• price calculation assumptions;

• known problems to disclose;

• significant contracts and consents;

• envisaged 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 arises, financing is delayed, or the seller must interrupt their transition.

Errors that complicate negotiation

Focusing solely on the 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 own numbers for working capital, earn-out payments, 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 real-world projects.

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, according to the mechanisms provided and the modifications agreed upon by the parties. It is necessary to distinguish an adjustment calculated according to a pre-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 stay 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 its drafting and the context. A clause negotiated in a business sale must be analyzed in the context of that specific transaction.

Can one use a purchase agreement template?

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 file. Have the agreement and its appendices reviewed by a legal professional who is familiar with business transactions.

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

This article presents 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 specificities of your transaction.