- Legal due diligence is generally handled by your lawyer, and typically reviews: - Corporate records and the minute book - Material contracts, such as suppliers, customers, financing, and…
- Financial due diligence is generally handled by your accountant, and typically reviews: - Historical financial statements and their reliability - Cash flow and profitability trends -…
Anyone buying a business hears the phrase "do your due diligence" constantly, but due diligence isn’t one task — it’s at least two, run by two different kinds of professionals, looking for two different kinds of problems. Understanding the difference between legal due diligence and financial due diligence helps you scope the work properly and avoid gaps where nobody actually checked something important.
Skipping either one is a common way buyers get surprised after closing. A business can look financially strong while carrying serious legal risk, or look legally clean while its numbers don’t hold up under scrutiny.
What Legal Due Diligence Covers
Legal due diligence is generally handled by your lawyer, and typically reviews:
- Corporate records and the minute book
- Material contracts, such as suppliers, customers, financing, and key vendors
- Commercial leases and whether they can be assigned
- Employee records and employment agreements
- Intellectual property, including trademarks, licences to use IP, and domain names
- Licences and regulatory permits needed to operate the business
- Litigation history, current disputes, and outstanding claims
- Environmental matters, where relevant to the business or its premises
- Insurance coverage
The goal is to identify legal risks and obligations that come with the business, and to figure out what needs to change, be assumed, or be excluded in the purchase agreement.
What Financial Due Diligence Covers
Financial due diligence is generally handled by your accountant, and typically reviews:
- Historical financial statements and their reliability
- Cash flow and profitability trends
- Working capital, meaning what’s needed to run the business day to day
- Accounts receivable and accounts payable, including aging and collectability
- Tax filings and compliance
- Inventory and asset valuation
The goal here is to understand what the business actually earns and owes, and to build the numbers that inform price, financing, and any post-closing purchase price adjustment.
Side by Side
| Legal Due Diligence | Financial Due Diligence | |
|---|---|---|
| Typically led by | Your lawyer | Your accountant |
| Main question | What obligations and risks come with this business? | What does this business actually earn, owe, and hold? |
| Feeds into | Representations, warranties, indemnities, disclosure schedule | Price, financing conditions, working-capital adjustment |
| Example finding | An unassignable lease or an unresolved lawsuit | Inflated inventory values or declining margins |
Where the Two Overlap
Tax filings and compliance sit in both worlds — your accountant reviews whether the numbers and filings are accurate, while your lawyer builds representations and indemnities around tax compliance risk into the purchase agreement. Contracts with financial terms, like a lease with escalating rent or a supplier agreement with volume commitments, are another overlap point: your lawyer reviews the legal obligation, and your accountant assesses its financial impact.
How Findings Feed Into the Purchase Agreement
Whatever legal and financial due diligence turns up doesn’t just sit in a report — it should shape the deal itself:
- Known risks get addressed through specific representations, warranties, and a disclosure schedule
- Unknown or contingent risks get addressed through indemnities, sometimes backed by a holdback or escrow
- Financial findings often drive a working-capital adjustment mechanism, comparing an estimated closing statement to a final post-closing statement
- Serious findings on either side can become closing conditions the seller has to satisfy before the deal completes
Frequently asked questions
Do I really need both a lawyer and an accountant, or can one person do both?
They’re different disciplines with different training. A lawyer isn’t qualified to opine on financial statement reliability, and an accountant isn’t the right person to draft representations, warranties, and indemnities. Most Ontario business purchases benefit from both working together.
Which type of due diligence should start first?
They usually run in parallel rather than sequentially, since findings from one side often affect what the other side needs to look at. Your lawyer and accountant should be coordinating, not working in isolation.
What happens if legal or financial due diligence turns up a serious problem?
Depending on what’s found, options include renegotiating price, adding specific indemnities or a holdback, making the issue a closing condition to be resolved first, or in some cases walking away from the deal entirely.
Is due diligence different for a share purchase versus an asset purchase?
Yes. A share purchase means you’re inheriting the corporation’s full legal and financial history, so both types of due diligence tend to go deeper, since undisclosed liabilities on either side come along with the shares.
This is a business purchase or sale question
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