Due Diligence When a Buyer Examines Your Ontario Business

Once a buyer is serious, they will want to look inside your business. This review, called due diligence, is how the buyer checks that what you have said about the company is true.

You can make it smoother by preparing first. This article covers the records buyers commonly ask for in Ontario and how to protect confidential information while they look.

What due diligence is and why sellers prepare

Due diligence is the buyer's investigation of your finances, legal position, contracts, people and compliance. Buyers use what they find to confirm the price, ask for changes to the agreement, or walk away.

Sellers benefit from doing their own review first. Problems you find yourself can be fixed or explained on your terms. Problems the buyer finds late can lead to price reductions, larger holdbacks or delays.

Records and documents to organize

The exact list depends on your business, but most reviews cover these areas:

• Corporate records: articles, by-laws, share register, director and shareholder resolutions, and filings.
• Financial records: financial statements, tax returns, and records of any GST/HST registration.
• Contracts: customer, supplier, lease, licence and financing agreements, including any that need consent to be assigned or that change on a sale.
• Employment records: employee lists, agreements, pay and vacation records, and each person's start date.
• Assets: lists of equipment, inventory, intellectual property and real property, and any registered security against them.
• Disputes and compliance: any claims, complaints, permits and regulatory matters.

Corporate records matter in a particular way. If the corporation is selling all or substantially all of its property outside the ordinary course, shareholder approval by special resolution is required, so your minute book should show who the shareholders are and how decisions were made. After a share sale, changes to directors or officers must be reported within 15 days by Form 1, Initial Return/Notice of Change.

Tax status and ownership history

If you hope to claim the lifetime capital gains exemption, the buyer's lawyer and your accountant will look at whether your shares qualify. The exemption is $1,250,000 for 2025, with a maximum deduction of $625,000. Records should support the following:

• The shares were not owned by anyone other than you or a related person or partnership for the 24 months before the sale.
• More than 50% of the fair market value of the assets was used mainly in an active business in Canada throughout those 24 months.
• At the time of sale, the corporation was a Canadian-controlled private corporation with assets meeting the 90% active-business test.

Preferred shares also deserve attention, because the deduction can be denied where a significant part of the gain is reasonably attributable to preferred share dividends that were not paid or were paid at less than 90% of the average annual rate of return. The structure of the deal matters too: when the corporation itself sells its business assets, the gain belongs to the corporation and the share-based exemption does not apply to it directly.

Protecting confidential information during review

Start with a confidentiality agreement before you open the data room, and share in stages, with the most sensitive material last. Customer lists, pricing and employee files are common concerns.

For personal information, organizations may use and disclose it for a prospective business transaction without consent if the parties have an agreement that the recipient will use it solely for purposes related to the transaction, protect it with appropriate safeguards, and return or destroy it within a reasonable time if the deal does not proceed. The information must also be necessary to decide whether to proceed. After closing, the parties may continue to use it only if they agree to use it for its original purposes, protect it and honour withdrawn consents, and one party must notify the individuals within a reasonable time. This exemption does not apply where the primary purpose or result of the deal is buying or selling personal information.

What to do next

Some buyers also bring special filings, such as foreign-investment notice, which must be given before the investment is implemented or within thirty days afterward, or competition notice for very large deals. Ask your lawyer whether any apply to your buyer.

• Build an index of the documents above and note any that are missing.
• Review contracts for consent or change-of-control terms.
• Ask your accountant to confirm the exemption tests against your records.
• Have a lawyer prepare or review the confidentiality agreement.
• Decide who on your team answers buyer questions, and keep a log of what was shared.

Frequently asked questions