A family-owned manufacturing company in southwestern Ontario had operated for 27 years, producing specialized components for the automotive supply chain and employing 34 workers across production, administrative, and sales functions. The founder, now in her late 60s, had built the enterprise from a modest machine shop into an operation generating approximately $4.2 million in annual revenue, with established relationships with 3 major tier-one suppliers and a reputation for precision work delivered on tight timelines. Her children had pursued careers outside the business, and with no internal successor willing or able to take over, she retained a business broker to explore sale options.

The broker identified a prospective purchaser: a regional competitor seeking to expand its production capacity and customer base. Initial discussions produced a preliminary understanding that the purchaser would acquire the business for a price in the range of $2.8 million to $3.4 million, subject to due diligence and negotiation of definitive terms. The parties exchanged a letter of intent in the 3rd week of discussions, setting out the proposed price range, a 60-day exclusivity period, and a target closing date approximately 90 days from signing of a definitive purchase agreement.

From the outset, the fundamental question of transaction structure remained unresolved. The seller preferred a share sale, which would allow her to benefit from the lifetime capital gains exemption and avoid the double taxation that can arise when a corporation sells its assets and then distributes proceeds to shareholders. The purchaser's advisors favoured an asset acquisition, citing concerns about unknown historical liabilities, the ability to select which contracts and obligations to assume, and the flexibility to allocate purchase price among asset classes for depreciation purposes. The company carried certain legacy obligations, including a pending claim from a former employee alleging wrongful dismissal and an environmental remediation requirement related to solvent storage practices from the 1990s.

The workforce presented additional complexity. Several long-tenured employees had accumulated significant service time, and the legal consequences of the transaction structure for their employment status, termination entitlements, and continuity of benefits remained a point of contention. The purchaser intended to retain most production staff but planned to eliminate certain administrative positions and restructure the sales function.

Draft purchase agreements were exchanged, containing extensive representations and warranties, conditions to closing tied to regulatory approvals and third-party consents, provisions for a holdback escrow to secure indemnification obligations, and a working capital adjustment mechanism tied to a closing date balance sheet. The parties proceeded toward closing with significant questions unresolved about how risks would be allocated, what would happen if material adverse changes occurred before closing, and what remedies would be available if either party failed to perform its obligations under the agreement.