Buying a Struggling Business in Ontario: What Extra Due Diligence You Need

Standard due diligence on a business purchase already covers a lot of ground: corporate records, financial statements, contracts, leases, employees, licences, litigation, and tax filings. When the target business is in financial distress, that standard list isn't enough. Financial pressure changes how a business behaves in the months before a sale — and some of those changes create risks a healthy-business checklist won't catch.

This article sets out what to add to your due diligence when the business you're looking at is struggling, not thriving.

Why Distress Changes the Diligence Picture

A business under financial pressure often starts making decisions differently: stretching payments to suppliers, falling behind on rent or remittances, delaying equipment maintenance, or losing key staff who see the writing on the wall. None of that shows up cleanly in a standard set of financial statements, which is exactly why it needs to be checked for directly.

Creditor Claims and Outstanding Debts

• Request a full list of creditors and amounts owed, not just what appears on the balance sheet — some obligations may be informal or recently arranged.
• Run a Personal Property Security Act (PPSA) search against the business to identify registered security interests in its equipment, inventory, and other personal property. This reveals liens you might not otherwise learn about from the seller directly.
• Ask whether any creditor has threatened legal action, demanded immediate payment, or discussed enforcing security.
• Confirm the status of any government remittances — HST and payroll source deductions in particular — since arrears here can complicate a transition even where the buyer isn't legally assuming the debt.

Employee-Related Risk

• Ask about any unpaid wages, vacation pay, or benefits owing to current or recently departed employees.
• Check whether key employees have already left or given notice — a distressed business often loses its best people first, and their departure can affect the value of what you're actually buying.
• Ask about any outstanding claims, grievances, or complaints from current or former staff.
• Understand what obligations, if any, would follow to a buyer under the Employment Standards Act, 2000 if you offer employment to existing staff as part of continuing the business — this depends on the specific structure and timing of the deal and is worth reviewing with a lawyer before making commitments to employees.

Supplier and Vendor Relationships

• Ask directly (where the seller permits it) whether key suppliers have tightened credit terms, reduced credit limits, or moved the business to cash-on-delivery.
• Identify any supplier owed a significant balance who could refuse to continue supplying the business after a change in ownership until arrears are addressed.
• Confirm whether any supplier contracts contain minimum purchase commitments or termination rights triggered by the seller's financial condition.

Lease and Premises

• Confirm the lease is in good standing directly with the landlord, not only through the seller's account — rent arrears are common in distressed businesses and directly affect whether a lease can be assigned.
• Check whether the landlord has already issued any default notices or is considering terminating the lease.

Insurance and Compliance

• Confirm insurance premiums are current and coverage hasn't lapsed — distressed businesses sometimes let coverage slide as cash gets tight.
• Check the status of any licences or permits required to operate, since renewal or compliance issues can pile up alongside other financial pressures.

Putting It Together: A Short Process

1. Start with the standard due diligence categories (corporate, financial, contracts, leases, employees, licences, litigation, tax).
2. Layer in the distress-specific checks above, focused on creditors, employees, suppliers, and the lease.
3. Flag anything that suggests liabilities aren't fully disclosed, and require specific representations and warranties (backed by indemnities) covering those areas in the purchase agreement.
4. Decide, with your lawyer and accountant, whether the findings should change price, structure (asset vs. share), or the deal terms — such as a holdback tied to resolving specific arrears before you rely on the seller's representations alone.

Frequently asked questions