What should due diligence cover before I buy a business?

The searches a lawyer runs

Searches are how we find debts and claims the seller may not mention. A corporate profile from the Ontario Business Registry confirms the seller exists, who its directors are and that it has not been dissolved. A Personal Property Security Act search shows registered security against the seller's equipment, inventory and receivables; anything registered must be paid out or discharged on closing or it follows the assets. Execution and litigation searches find judgments and lawsuits. A bankruptcy search and, where there is real property, a title search complete the set.

Two Ontario clearances matter: a WSIB clearance certificate, and a retail sales tax clearance certificate under s. 6 of the Retail Sales Tax Act, which a buyer who closes without it can come to regret.

The financial and tax review

Ask for at least three years of financial statements, corporate tax returns and notices of assessment, HST returns, payroll remittance records and twelve months of bank and merchant statements. Your accountant checks that the statements tie to the tax filings and to the bank, then normalizes earnings by removing owner perks and one-off items so you can see what the business really produces.

Unremitted source deductions and HST are the seller's debts, but the Canada Revenue Agency's deemed-trust rights can reach the seller's assets, so we ask for proof that remittances are current. Where doubt remains, a holdback or a specific indemnity in the purchase agreement is the usual answer.

Contracts, the lease and licences

Read every contract the business needs to operate: the lease, supplier and customer agreements, equipment leases, software licences and franchise documents. Look for clauses that prevent assignment without consent or that end the contract on a change of control. Each one is either a consent you must obtain before closing or a risk you are pricing in.

The lease deserves the most time. Check the remaining term, renewal options, the assignment clause, any personal covenant and whether rent is current. Licences and permits often do not transfer at all, and the lead time for a fresh application can set your closing date.

Employees and their history

Get a list of every employee with start date, position, pay, benefits and any written contract. In a share purchase they stay employed by the same corporation. In an asset purchase, under s. 9 of the Employment Standards Act, 2000, anyone you hire within thirteen weeks carries their service with the seller into your employment for the purposes of the Act. That affects the notice, severance and vacation entitlements you may one day have to pay.

Ask about terminations in the last two years, outstanding complaints, WSIB claims and whether any employees are unionized, because a collective agreement binds a successor employer under s. 69 of the Labour Relations Act, 1995.

What to do with what you find

Diligence rarely ends with a clean bill of health. What matters is that each finding lands somewhere: a price reduction, a holdback until a risk expires, a specific indemnity from the seller, a condition the seller must satisfy before closing, or a decision to walk away while you still can. Findings also feed the representations and warranties in the purchase agreement, which is why we prefer diligence to be well advanced before the agreement is signed.

The Bulk Sales Act, which once required creditor lists and affidavits on business sales, was repealed in March 2017. Buyers now rely on searches, warranties and holdbacks instead.