Selling a business with a partner: shotgun clauses and the shareholder agreement
When two owners sell, the shareholder agreement decides the order of events. How a shotgun clause works in Canada, and how partners settle a price they disagree on.
When partners sell, the shareholder agreement sets the rules. A right of first refusal lets the others buy first, and a shotgun clause lets one partner name a price the other must accept as buyer or seller. Drag-along and tag-along rights tie the minority to the majority’s sale. Each partner claims their own capital gains exemption.
Two owners, one sale
Selling a business with a partner starts with a document most partners signed years ago and have since filed away: the shareholder agreement. It sets out who may sell and at what price, including when the owners disagree. A buyer’s lawyer asks for it early, since the due diligence checklist includes any agreement that gives other holders rights on a sale.
Partners usually reach the decision to sell at different moments. One is 64 and ready, the other is 51 and wants another decade. The clauses below decide how that gap gets settled, and reading them before the first conversation with a buyer saves the most expensive kind of surprise.
What the shareholder agreement controls
For a federally incorporated company, section 146 of the Canada Business Corporations Act recognizes a written agreement among all the shareholders, called a unanimous shareholder agreement. It also deems anyone who acquires shares subject to that agreement to be a party to it. A buyer of one partner’s shares therefore takes on the agreement along with the shares. Provincially incorporated companies are governed by their own province’s act, so confirm which one applies to yours.
Many agreements include a right of first refusal. Before a partner sells shares to an outsider, the other shareholders may buy them on the same terms. A buyer who negotiates for months with one partner can lose the deal to the other at the last step, one of the ways a business sale falls through, so a buyer will want the waiver signed before spending money on diligence.
How a shotgun clause works
A shotgun clause, also called a buy-sell clause, is a common way out of a deadlock in Canadian shareholder agreements, and it runs in a fixed order.
- 01One partner delivers a written offer to buy the other’s shares at a stated price per share.
- 02The partner who receives it has a set period, stated in the agreement, to choose a side.
- 03Either the recipient sells at that price, or the recipient buys the offering partner’s shares at the same price per share.
- 04The sale closes on the date and terms the clause sets, usually with a deadline for the buyer’s financing.
Take, as an illustration, a company two partners own equally. One offers $1.5 million for the other’s half. The other can take the $1.5 million or pay $1.5 million and own the whole company. The person naming the price has every reason to name a fair one, since it may be turned around on them. The clause favours the partner with readier access to financing, though, and a partner who would struggle to raise $1.5 million within the period the clause allows holds the weaker hand.
Tag-along and drag-along rights
A tag-along right protects a minority holder. If the majority sells to an outside buyer, the minority can join the sale and sell its own shares on the same terms. A drag-along right works the other way: when holders of a set majority accept an offer for the whole company, the rest must sell to that buyer on the same terms.
Many buyers of owner operated companies want all of the shares, which makes the drag-along the clause that turns a majority’s yes into a completed sale. Check the threshold it uses and whether it guarantees the same price per share for every holder. Who buys Canadian businesses describes each kind of buyer and what it looks for.
The common clauses, side by side
| Clause | What it does in a sale | Who it protects |
|---|---|---|
| Right of first refusal | Lets the other partners buy the shares on the terms an outside buyer offered | The partners who stay, who choose their co-owners |
| Shotgun or buy-sell | One partner names a price, and the other must sell or buy at that price | Both partners in a deadlock, with an edge to the one holding cash |
| Tag-along | Lets minority holders sell to the same buyer on the majority’s terms | Minority holders |
| Drag-along | Obliges the rest to sell once a set majority accepts an offer for the whole company | The majority, and a buyer who needs every share |
| Valuation clause | Fixes how the price is set when one partner buys another, by formula or by a valuator | Both sides, by settling the method before a dispute |
| Death and disability buyout | Requires the purchase of a partner’s shares on death or long illness, sometimes funded by insurance | The departing partner’s family, and the partners who continue |
When partners disagree on the price
A partner buying another out needs a price, and two methods are common. A formula in the agreement, such as a multiple of adjusted earnings, is quick to apply. It also goes stale, because a multiple chosen ten years ago may sit far from what the market pays today. Our own ranges run from 2.0 to 7.5 times adjusted earnings depending on the industry, and the table by industry shows where a business sits.
The second method is an independent valuation. In Canada that usually means a Chartered Business Valuator, the designation granted by the CBV Institute, which describes itself as Canada’s business valuation authority since 1971 and runs a directory to find one. Agreements commonly have the partners agree on one valuator, or each appoint their own with a third to settle the gap. The clause should also say whether a minority stake is valued as its share of the whole company or at a discount, a choice that can move the price a long way.
Each partner’s own exemption and covenants
The lifetime capital gains exemption, $1,275,000 in 2026, belongs to each individual. CRA’s page on the capital gains deduction sets it out as a claim by a resident of Canada with deduction limit available. Two partners who each own qualifying shares directly can each shelter a gain up to their own limit on the same sale.
The company’s asset tests apply to both partners at once, so purifying the company is a joint project. A partner whose shares sit in a holding company has a separate calculation and needs advice early. Each partner usually signs a non-compete of their own as well, and the holdback is usually shared in proportion to the shares each partner sold.
Where one partner wants to sell and the other wants to stay, a buyer can sometimes take the whole company and keep the younger partner on with a stake or a contract. The Quick AI valuation gives both partners the same range to start from, before either of you has spoken to a buyer.
Questions owners ask
- How does a shotgun clause work in Canada?
- One shareholder offers to buy the other’s shares at a stated price. Within the period the agreement sets, the other must either sell at that price or buy the offering shareholder’s shares at the same price per share. It gives the price setter a reason to be fair, and it favours the partner with readier financing.
- Can my partner block the sale of the business?
- That depends on the shareholder agreement. A right of first refusal lets your partner buy your shares on the terms an outside buyer offered, and a drag-along right lets a set majority oblige the rest to sell. Where the agreement is silent, a buyer who wants every share needs every shareholder to agree.
- Do both partners get the lifetime capital gains exemption?
- Each individual who owns qualifying shares claims their own exemption, $1,275,000 in 2026, against their own gain. Two partners who own shares directly can each use their limit on the same sale. A partner holding shares through a holding company has a separate calculation.
- Who values the business when partners disagree?
- The shareholder agreement usually names the method. A formula is quick and may be out of date, while a Chartered Business Valuator, designated by the CBV Institute, gives an independent opinion. The clause should say whether a minority stake is valued at its share of the whole or at a discount.