Due Diligence When Buying a Business in Ontario: What to Investigate Before You Sign

Signing a purchase agreement without proper due diligence is one of the costliest mistakes a business buyer can make. Due diligence — meaning the careful investigation of a business before you commit to buy it — is how you verify what the seller has told you, uncover problems that were not disclosed, and price the risk you are taking on. In Ontario, this process typically happens between the signing of a letter of intent and the signing of a formal purchase agreement, during the exclusivity period you negotiated.

This article walks through the key categories of due diligence every buyer should consider and identifies common red flags that signal trouble.

Why Due Diligence Matters More in a Share Purchase

If you are buying shares, you are buying the corporation — including its history. Every lawsuit that was ever filed against the company, every tax debt the CRA might audit, every environmental issue on the property: these potential liabilities come with the shares. Due diligence is how you see them before you own them.

In an asset purchase, your exposure to the seller's past is limited — but you still need to confirm that the assets you are buying actually exist, are unencumbered, and are what the seller says they are.

The Main Categories of Due Diligence

1. Corporate and legal standing

• Obtain and review the corporation's constating documents: articles of incorporation, by-laws, shareholder agreements, and any amendments.
• Confirm the corporation is in good standing under the Ontario Business Corporations Act (or the Canada Business Corporations Act if federally incorporated). You can search ONBIS (Ontario's business registry) and Corporations Canada for basic information.
• Review the minute books: are all share issuances, director elections, shareholder resolutions, and annual meetings properly recorded? Poor record-keeping is common and can create problems on closing.
• Check for any unanimous shareholder agreements that might restrict what the buyer can do post-closing.

2. Financial review

• Request financial statements for the last three to five years — ideally reviewed or audited by an accountant, not just prepared internally.
• Examine accounts receivable: how old are they, how collectible are they?
• Look at recurring revenue versus one-time revenue. Is the business as profitable as it appears, or does it depend on a single client that could leave?
• Review accounts payable and any outstanding loans.
• This part of due diligence belongs squarely with your accountant. A business lawyer reviews the legal documents; a chartered professional accountant reviews the numbers. You need both.

3. Tax compliance

• Ask for copies of corporate tax returns and notices of assessment for the past three to five years (as of writing — verify what the CRA or your accountant recommends).
• Are there outstanding CRA assessments or audits underway? These can be large and unexpected.
• Is the business registered for HST? Is the HST account current?
• Are payroll remittances (CPP, EI, income tax withholdings) up to date? Unpaid payroll remittances are a serious liability because the CRA can pursue directors personally.
• Tax due diligence should involve your accountant.

4. Contracts and customer relationships

• Review all material contracts: customer agreements, supplier agreements, service contracts, distribution agreements.
• Do any contracts have change-of-control clauses? These require the counterparty's consent if the shares of the company change hands, or if the business is sold. Missed change-of-control triggers can void key contracts.
• How many clients represent the majority of revenue? High customer concentration is a risk — if the top client walks after closing, you may have overpaid.
• Review any ongoing contracts for auto-renewal provisions, termination rights, and exclusivity.

5. Employees and employment matters

• Obtain a full list of employees with their start dates, current compensation, benefits, and any written employment agreements.
• Long-service employees have significant entitlements under Ontario's Employment Standards Act, 2000 — both statutory notice/severance and, in some cases, common law reasonable notice that goes beyond the minimums.
• Are there any claims, human rights complaints, or workplace safety orders outstanding?
• In a share purchase, all employment relationships continue. In an asset purchase, the buyer may technically be hiring new employees, but obligations under the Employment Standards Act, 2000 may still apply depending on the facts.

6. Real property and leases

• If the business operates from leased premises, review the lease: term, rent, renewal options, and whether landlord consent is needed on a change of control or assignment.
• Are there any environmental issues with the property? Environmental liability in Ontario can be significant and remediation costly.
• If real property is included in the deal, consult a real estate lawyer and potentially an environmental consultant.

7. Intellectual property

• What intellectual property does the business own — trademarks, patents, software, trade secrets, customer databases?
• Are IP registrations current? Are they registered in the name of the corporation (not the founder personally)?
• Review any licensing agreements: are you buying the right to use the IP, or the IP itself?

8. Litigation and disputes

• Ask for a litigation search and a list of any ongoing, threatened, or settled claims.
• Review any demand letters received by the business.
• Check court registries if there is reason to believe undisclosed claims exist.

Red Flags That Should Give You Pause

• Seller refuses to provide financial statements or delays producing documents.
• Key contracts are in the owner's personal name, not the corporation's.
• Unexplained gaps in the minute books or unissued share certificates.
• High staff turnover in the past year.
• CRA assessments that were "reassessed" and settled for a different amount than filed.
• Heavy dependence on the seller personally — key relationships, technical knowledge, licences held in the owner's name.
• Verbal assurances that don't appear in writing.

Frequently asked questions