Due diligence is not a formality. It is the part of the deal where you find out whether the business you were shown is the business you are buying — and it is your only chance to change the price, change the structure, or walk away for nothing.
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The first pass is public record. A corporate profile report shows who the directors and officers are, whether the corporation is active, and whether its filings are current. The minute book shows whether the shares the seller is selling were ever properly issued and whether the <a href="https://www.ontario.ca/laws/statute/90b16">Business Corporations Act (Ontario)</a> formalities were followed. In small companies minute books run years behind, and that has to be fixed before a share sale can close.
A personal property security search shows registered security against the business's equipment, inventory and receivables — bank loans, equipment leases, vehicle financing, and old registrations nobody ever discharged. Execution searches show unsatisfied judgments. Security registered federally by a bank sits in a separate register and is missed often. Every registration has to be discharged, deliberately assumed, or paid out of closing funds.
Then the documents the seller controls: financial statements and the accountant's year-end file, tax filings and CRA account balances, the lease, customer and supplier contracts, employment agreements and the payroll register, insurance history, and any claim threatened or filed. The point is not to read everything. It is to test the two or three numbers the price was built on.
Sector adds items. A restaurant means a liquor licence, health inspections and equipment leases. A trades business means WSIB, licensing and bonding. A clinic means regulatory college requirements and patient records. A franchise means the franchisor's consent and disclosure. <a href="/buying-selling-a-business">Our practice page</a> sets out the industries we act in.
Some obligations attach to the business itself. Under Ontario's Workplace Safety and Insurance Act, 1997, a person who buys all or part of a business is liable for the amounts the seller owed the WSIB immediately before the sale, and the Board can enforce that against the buyer as if the buyer had always been the employer. A clearance certificate is a standard closing condition for exactly that reason.
Employment liability follows too. The <a href="https://www.ontario.ca/laws/statute/00e41">Employment Standards Act, 2000</a> treats employment as continuous where a buyer hires the seller's employees, so the years worked for the seller count when the buyer later terminates. That exposure appears on no balance sheet. Either price it into the deal, or require the seller to terminate and pay it out before closing.
The lease brings its own tail: arrears, unperformed repair obligations, restoration at the end of the term, and operating-cost reconciliations that land after closing. Where the business handles fuel, solvents, dry-cleaning chemicals or automotive fluids, environmental exposure attaches to the site and its occupier — an environmental site assessment is worth more than an indemnity from a seller who is about to retire.
Tax debts generally stay with the corporation, which is why a share buyer inherits them and an arm's-length asset buyer usually does not. Where buyer and seller are not at arm's length, both the <a href="https://laws-lois.justice.gc.ca/eng/acts/I-3.3/">Income Tax Act</a> and the <a href="https://laws-lois.justice.gc.ca/eng/acts/E-15/">Excise Tax Act</a> can make the transferee liable for the transferor's tax up to the value transferred.
Findings are leverage, not a verdict. Most of what diligence turns up is fixable: a discharge is obtained, an arrears balance is paid from closing funds, a contract is assigned, a licence is applied for. The work is deciding, item by item, whether the answer is a condition of closing, a price reduction, a holdback, or an indemnity that survives closing.
A holdback is the most useful tool in a small deal. Part of the price stays in the lawyer's trust account for an agreed period and is released only if the identified risk does not materialize. It is worth considerably more than a warranty from a seller who will have spent the money by the time the problem surfaces.
Representations in <a href="/purchase-agreement-business-lawyer-ontario">the purchase agreement</a> should mirror what diligence could not verify. If you could not confirm that every employee entitlement had been paid, that becomes a specific representation with a specific indemnity, surviving closing for a stated period. Generic warranties with a short survival period are close to worthless.
Set the diligence period in <a href="/letter-of-intent-lawyer-ontario">the letter of intent</a> and make it long enough. Financial statements, a landlord's consent and a franchisor's approval each take weeks. On a franchise resale the <a href="https://www.ontario.ca/laws/statute/00a03">Arthur Wishart Act (Franchise Disclosure), 2000</a> can require a disclosure document at least 14 days before you sign or pay, because the exemption for a franchisee's own resale does not apply where the grant is effected by or through the franchisor or the other conditions in section 5(7)(a) are not met.
Plan on three to six weeks for an owner-operated business, and longer where a landlord's consent or a franchisor's approval is involved. Searches come back quickly. The delays are the seller assembling records, the accountant answering questions, and third parties responding. Set the diligence deadline in the letter of intent with that in mind.
Yes, just a narrower version. You are not inheriting the corporation, but you are taking the equipment, the lease, the employees and the location. Registered security, WSIB arrears, environmental problems and lease defaults all follow those. The searches change; the need to verify the numbers the price was built on does not.
It searches Ontario's register of security interests in personal property, showing what is registered against the business's equipment, inventory and receivables — bank loans, equipment leases, vehicle financing. Anything registered must be discharged, deliberately assumed, or paid out of closing funds. Otherwise the buyer takes the asset subject to somebody else's security.
Treat that as a finding. A seller who will not produce year-end statements, tax filings and a payroll register is asking you to buy a number you cannot test. Sign a confidentiality agreement to remove the excuse, then make production a condition with a deadline. If it is still refused, the price should reflect it.
The buyer, in almost every deal, which is why exclusivity is negotiated in the letter of intent. The costs are the legal review, the searches and clearances, the accountant's work on the financial statements, and where relevant an environmental site assessment or equipment inspection. Sellers occasionally contribute where they have demanded an unusually long exclusivity period.
Open your file tonight — a licensed Ontario lawyer will confirm everything with you by tomorrow.