Business Purchase Due Diligence Checklist for Ontario Buyers

Buying a small business means taking on its history along with its equipment, customers and name. Due diligence is the period before you sign when you check what the seller has told you and look for problems that would change the price or the terms.

This checklist is a general guide for a first-time buyer. What you need depends on whether you are buying assets or shares, and on the business itself, so use it as a starting point and confirm the details with a lawyer and an accountant.

Start with the deal structure

In an asset purchase you buy particular assets, and often take on staff. In a share purchase you buy the corporation itself, and it brings its past with it. The checks you prioritize change with the structure.

• A buyer of business assets can take them subject to the seller's lender's security.
• In a share purchase, the corporation keeps its liability for unremitted payroll source deductions, and the old directors remain personally exposed.
• Selling a company's shares does not itself create a new employment relationship, so the corporation remains the employer and keeps its employment obligations.

Financial and tax records to request

Ask for several years of financial statements, tax returns, sales records, a list of what the business owes, major customer and supplier contracts, and the insurance policies. Compare them against bank statements and what the seller has told you.

CRA will discuss a business's tax accounts with a buyer's representative only if the business authorizes it. The business can authorize a representative online in My Business Account, or confirm a request the representative submits through Represent a Client. Form AUT-01 gives access by phone, mail, fax and in person only, and it must reach the CRA tax centre within six months of signing.

Tax debts matter because payroll source deductions an employer withholds are deemed held in trust for the Crown despite any security interest, although a prescribed security interest is excluded from that priority rule. GST/HST a person collects is also deemed held in trust for the Crown, but that deemed trust does not apply to amounts collected before the person becomes bankrupt, and prescribed security interests are excluded from the definition of security interest for this rule. How these rules apply to your purchase depends on the facts, which is why buyers search and negotiate holdbacks.

If you are buying a business and acquiring all or substantially all of the property reasonably necessary to carry it on, you and the seller may be able to jointly elect on Form GST44 that no GST/HST is payable on the sale. Even with a GST44 election, GST/HST still applies to a taxable service the seller supplies, to a taxable supply of property by lease or licence, and, if the buyer is not a registrant, to a taxable sale of real property. The GST44 election cannot be made if the seller sells only one or more assets of the business rather than the business. It also cannot be made if the seller is a GST/HST registrant and the buyer is not.

Legal searches to run on the seller

• Personal Property Security Registration (PPSR): a public database you can search against an individual debtor, a business debtor or a motor vehicle. See the separate article on lien searches for how to read the results.
• Execution (writ) search: a creditor with a judgment can file a writ of seizure and sale of personal property with the enforcement office, and buyers search for these filed writs against the seller. Names match only if they are identical, so search the seller's exact legal name.
• Corporate search: the Ontario Business Registry sells products such as a Profile Report and a Certificate of Status. Sole proprietorships, partnerships and limited partnerships operating under a registered business name are searched through Business Name, Limited Partnership (BNLP) products.

Employees, WSIB and Ontario sales tax

• Employment: if you employ the seller's employee after a sale, the employment is deemed not to have been terminated, and the employee's service with the seller counts later. Prior service does not carry over if you hire the employee more than 13 weeks after their last day with the seller or the day of the sale, whichever is earlier. In an asset purchase where employees are kept, the buyer alone is responsible for later termination and severance obligations.
• Union: if the seller is bound by a collective agreement, the buyer is bound by it until the Ontario Labour Relations Board declares otherwise, and "sells" includes leases and transfers, but in the building services sector a collective agreement generally does not follow through to bind the purchaser.
• WSIB: a person who acquires all or part of an employer's business is liable for amounts the employer owed under the Act immediately before the disposition, but a buyer of only part of a business is liable only for amounts relating to the part it acquired, and it must describe the assets and prove their value relative to the whole business or WSIB will estimate the share and charge a pro-rated amount. A WSIB purchase certificate waives WSIB's right to hold the buyer liable for the seller's amounts owing up to the date of disposal. It is valid for 30 days from issue, and the sale must close within that time.
• Retail sales tax: the Ministry of Finance says people who sell a business or its assets must get a Retail Sales Tax (RST) Clearance Certificate, and a buyer who does not get one may be liable for RST the seller owes. The request must be made at least two weeks before the sale. Whether it applies depends on the seller, so confirm with the Ministry.

What to do next

• Decide, with your lawyer, whether you are buying assets or shares.
• Send the seller a written document request covering financial, tax, legal, employee and premises records.
• Get the seller's written authorization so your representative can discuss CRA accounts.
• Run the PPSR, execution and corporate searches against the seller's exact legal name.
• Request the WSIB purchase certificate and ask the Ministry of Finance whether an RST clearance applies.
• Have your accountant review the numbers, and ask your lawyer about holdbacks and indemnities.
• Review the commercial lease early, since the landlord's approval can affect timing.

Frequently asked questions