Due Diligence When Selling a Business in Ontario: Seller's Checklist

Once a buyer is serious, they will want to look inside your business. This review is called due diligence, and it is the buyer's chance to confirm that what you have told them is true.

Sellers who have their records ready tend to have smoother negotiations. This article walks through what to organize, the legal tests buyers often check, and the problems that commonly slow or derail a sale in Ontario.

What buyers are actually checking

A buyer wants to know three things: that you own what you say you are selling, that the financial picture is accurate, and that there are no hidden liabilities. Your sale agreement will usually contain promises about these points, and those promises are only as safe as your records.

Missing or messy paperwork does not always kill a deal, but it gives the buyer a reason to lower the price, ask for a holdback or walk away.

Records to organize before the buyer asks

• Corporate records: articles, by-laws, minute book, share register, and the names of current directors and officers.
• Share ownership history, including who has held each share and when. This matters for tax tests that look back over 24 months.
• Financial statements, tax returns and GST/HST filings, with explanations for any unusual items.
• Material contracts with customers, suppliers and lenders, including any that restrict a sale or need consent.
• Your commercial lease, any assignment clause and any landlord correspondence.
• Employee list, employment agreements, vacation balances and any open complaints.
• Security registrations against your assets and any loans that must be paid out at closing.
• Licences, permits, insurance policies and any open claims or disputes.

If you will sell through a corporation, also confirm who must approve the deal. In Ontario, a sale of all or substantially all of a corporation's property outside the ordinary course of business requires shareholder approval. That approval is effective when shareholders pass a special resolution, which means at least two-thirds of the votes cast at the meeting or a resolution signed by all voting shareholders.

Tax tests a buyer's lawyer may look at

If you are an individual selling shares, you may be able to claim the lifetime capital gains exemption. For 2025 the exemption is $1,250,000, which gives a maximum deduction of $625,000. To qualify, the shares must be qualified small business corporation shares, and the corporation must meet several tests.

• The shares must not have been owned by anyone other than you or a related person or partnership for the 24 months before the sale.
• Throughout those 24 months, more than 50% of the fair market value of the corporation's assets must have been used mainly in an active business in Canada, or be qualifying connected-corporation shares or debt.
• At the time of sale, the corporation must meet the 90% test: 90% or more of the fair market value of its assets must meet the active-business tests.

Two limits are worth knowing. The exemption is for an individual selling shares, so when the corporation itself sells its business assets, the gain belongs to the corporation and the exemption does not apply to it directly. The capital gains deduction can also be denied where a significant part of the gain is reasonably attributable to unpaid or low preferred-share dividends. An accountant can confirm how these rules apply to your structure.

Employees, privacy and sale-agreement risk

In an Ontario business sale, if the buyer employs one of your employees, the sale does not end the employment. The buyer is treated as the employer, and the employee's service with you carries over for entitlements such as vacation, notice of termination and leave eligibility. Prior service does not carry over if the buyer hires the employee more than 13 weeks after the earlier of the employee's last day with you or the day of the sale.

Buyers will also ask to see employee and customer records. Federal privacy law allows organizations to share personal information for a prospective business transaction without consent, but only if the parties have an agreement that the recipient will use it solely for the transaction, protect it and return or destroy it if the deal does not proceed. The information must also be necessary to decide whether to proceed.

After closing, claims under the sale agreement are generally subject to a two-year limitation period running from discovery of the claim. There is also an outer limit of 15 years from the act or omission. Parties to a business agreement may vary or exclude limitation periods, so the agreement may set its own survival period for representations and warranties.

Common deal-breakers and what to do next

• Share ownership that is unclear or undocumented.
• A lease or major contract that cannot be transferred without consent you have not requested.
• Financial statements that do not match tax filings.
• Employee issues that were never written down.
• Tax-status assumptions, such as exemption eligibility, that nobody has verified.

Start by building an index of your records, then have your lawyer and accountant review it before buyers do. Fixing gaps in advance is almost always cheaper and calmer than fixing them under a closing deadline. After closing, remember that new directors or officers must be reported within 15 days through an Initial Return/Notice of Change (Form 1) under the Corporations Information Act.

Frequently asked questions