Due Diligence When Buying a Business in Ontario
Buying an existing business can provide immediate access to customers, employees, equipment, contracts, intellectual property, and established revenue. However, it can also expose the buyer to liabilities that were not obvious during the initial negotiations.
Financial statements and seller representations provide useful information, but they do not tell the entire story. A business may have valuable assets while also carrying unpaid taxes, employee claims, secured debt, contractual defaults, privacy risks, or disputes with important customers.
Due diligence is the process of investigating the business before completing the purchase. It allows the buyer to confirm what is being acquired, identify material risks, and determine whether the proposed price and transaction structure remain appropriate.
The depth of the investigation should reflect the size, industry, complexity, and risk profile of the business. This guide explains the principal areas Ontario buyers should consider.
Start With the Transaction Structure
The first question is whether the buyer will purchase shares or selected business assets.
In a share purchase, the buyer acquires the shares of the corporation. The corporation continues to own its assets, enter contracts, employ its workers, and remain responsible for its liabilities.
In an asset purchase, the buyer acquires specified assets and may agree to assume selected liabilities. The seller generally retains assets and obligations that are not included in the agreement.
This distinction affects the scope of due diligence.
A share purchaser must investigate the entire corporation because its history and liabilities generally remain with it after the ownership change. An asset purchaser can be more selective, but must carefully identify the assets, contracts, employees, permits, and obligations required to continue the business.
The Canada Revenue Agency also treats share and asset purchases differently. For example, a purchase of corporate shares is generally not subject to GST/HST, while an asset transaction may require a different analysis and may qualify for a joint election in certain circumstances.
The transaction structure should be reviewed with legal and tax advisers before the parties finalize the purchase terms.
When Should Due Diligence Begin?
Preliminary investigation often begins before the buyer signs a letter of intent. More detailed due diligence usually begins after the parties have agreed on the basic transaction terms and entered into a confidentiality or non-disclosure agreement.
The letter of intent may establish:
The proposed purchase price
Whether the transaction is an asset or share purchase
An exclusivity period
The due diligence deadline
Access to business records
Financing conditions
Confidentiality obligations
Circumstances in which either party may terminate negotiations
Due diligence should be substantially completed before the buyer becomes unconditionally obligated to close.
The purchase agreement may also contain conditions allowing the buyer to terminate the transaction if the results are not satisfactory. Those conditions must be drafted carefully. A buyer should not assume that a general due diligence concern will automatically permit withdrawal from a binding agreement.
Confirm the Seller and the Business
The buyer should confirm the legal identity and status of the seller.
This may involve reviewing:
The corporation’s legal name
Articles of incorporation and amendments
Corporate bylaws
The corporate minute book
Shareholder and director registers
Annual returns and corporate filings
Business names used by the company
Share certificates and ownership records
Shareholders’ agreements
Previous reorganizations or ownership transfers
Subsidiaries, affiliates, and holding companies
A Corporation Profile Report can provide information about an Ontario corporation, while the Ontario Business Registry allows users to search publicly available business information and order search products.
The records should confirm that the seller owns the shares or assets being sold and has the authority to complete the transaction.
Missing or outdated records do not always prevent a sale, but they may need to be corrected before closing.
Review Financial and Tax Information
Financial due diligence is usually conducted with an accountant or financial adviser.
The buyer may review:
Annual financial statements
Interim financial statements
Corporate tax returns
GST/HST filings
Payroll accounts and remittances
Bank statements
Accounts receivable and payable
Existing debt
Cash-flow information
Budgets and forecasts
Inventory records
Capital expenditures
Owner compensation
Related-party transactions
Unusual or non-recurring expenses
The buyer should determine whether the company’s reported earnings accurately reflect its ongoing performance.
For example, financial statements may include personal expenses, non-market compensation, one-time revenue, or expenses that will change after closing.
Customers may also delay payments, dispute invoices, or represent an unusually large portion of total revenue.
The buyer’s accountant should assess the reliability of the information and identify adjustments that may affect valuation or the purchase price.
Search for Debt and Security Interests
A business may have granted security over its equipment, inventory, accounts receivable, or other personal property.
A search of Ontario’s Personal Property Security Registration system can identify registered security interests and liens. The system is a public database used for registrations and searches involving personal property.
The buyer should determine:
Which secured debts exist
Which assets are subject to security
Whether the debt will be repaid at closing
Whether registrations will be discharged
Whether any security will remain after the purchase
Whether lender consent is required
In an asset transaction, the buyer should not assume that purchasing equipment from the business automatically removes an existing security interest.
Appropriate searches, payout statements, discharge documents, and closing conditions should be coordinated before funds are released.
Examine Material Contracts
Contracts can be among a business’s most valuable assets. They can also create significant continuing obligations.
The buyer should review agreements with:
Customers
Suppliers
Distributors
Independent contractors
Software providers
Marketing agencies
Equipment lessors
Financial institutions
Franchise systems
Landlords
Professional advisers
Government agencies
The review should identify:
The term and renewal provisions
Pricing and payment obligations
Termination rights
Minimum purchase commitments
Exclusivity obligations
Service standards
Indemnities
Liability limitations
Personal guarantees
Default provisions
Assignment restrictions
Change-of-control provisions
A share sale may trigger a contractual change-of-control clause even though the corporation remains a party to the agreement. In an asset sale, the contract may need to be assigned to the buyer, which can require the other party’s consent.
The buyer should identify required consents early. A transaction may have limited value if an essential customer, supplier, landlord, or licensor refuses to continue the relationship.
Delta Law’s contract law services include reviewing and negotiating purchase agreements, commercial contracts, assignments, consents, and other transaction documents.
Review Employees and Independent Contractors
The buyer should understand who works for the business and on what terms.
The review may include:
Employment agreements
Independent contractor agreements
Compensation and bonus arrangements
Commission plans
Vacation entitlements
Benefits and pension plans
Workplace policies
Confidentiality agreements
Intellectual-property assignments
Termination provisions
Existing or threatened claims
Workplace safety matters
Accommodation obligations
Key-person dependencies
The buyer should also consider whether individuals described as independent contractors may legally be treated as employees.
In a share purchase, employment relationships generally continue with the corporation. In an asset purchase, the buyer and seller must determine which employees will receive offers and how accrued entitlements, termination obligations, and continuity of service will be addressed.
Employment issues should be reviewed with employment counsel where appropriate.
Confirm Ownership of Assets and Inventory
The buyer should verify that the seller owns the assets included in the transaction.
Relevant records may include:
Equipment purchase documents
Vehicle registrations
Equipment leases
Inventory reports
Maintenance records
Warranties
Asset lists
Repair histories
Importation records
Supplier invoices
The buyer should determine whether any important assets are leased, financed, shared with another company, or personally owned by a shareholder.
Inventory should also be assessed for condition, age, marketability, and obsolescence. The purchase agreement should explain how inventory will be counted and valued at closing.
Investigate Intellectual Property
The business may depend on its name, branding, website, software, customer databases, proprietary processes, or original content.
Due diligence should determine:
Which trademarks are registered
Who owns the business name and logo
Who registered the domain names
Whether employees or contractors assigned their work to the company
Whether software is owned or licensed
Whether licences can be transferred
Whether third-party materials are being used lawfully
Whether infringement claims exist
Whether confidential information is adequately protected
The Canadian Intellectual Property Office maintains a searchable database containing active and inactive Canadian trademarks.
Registration searches are useful, but ownership should also be confirmed through agreements, assignments, development contracts, and payment records.
Review the Commercial Lease
If the business operates from leased premises, the lease may be essential to the transaction.
The buyer should review:
The remaining lease term
Renewal options
Base rent and additional rent
Permitted use
Repair and maintenance obligations
Personal guarantees
Security deposits
Insurance requirements
Assignment provisions
Change-of-control restrictions
Relocation rights
Demolition clauses
Existing defaults
An asset purchaser may require the landlord’s consent to an assignment. A share purchase may also require consent if the lease treats a change in corporate control as a transfer.
The buyer should confirm that the premises are suitable for the intended business and that any necessary licences or zoning requirements can be maintained.
Examine Privacy and Cybersecurity Practices
Many businesses collect personal information about customers, patients, employees, or website users.
The buyer should investigate:
What personal information is collected
Where the information is stored
Who can access it
Which service providers process it
Whether privacy policies are current
Whether proper consents have been obtained
Whether data breaches have occurred
Whether cybersecurity incidents are documented
Whether the information can legally be transferred
How records are retained and destroyed
Regulated industries may be subject to additional privacy, confidentiality, and record keeping requirements.
A valuable customer database may become a liability if it was collected improperly, inadequately secured, or cannot be transferred to the buyer.
Check Licences and Regulatory Compliance
The buyer should confirm which licences, permits, approvals, registrations, or professional authorizations are required to operate the business.
These may relate to:
Municipal licensing
Professional regulation
Health and safety
Food handling
Alcohol sales
Environmental compliance
Importing or exporting
Transportation
Construction
Consumer protection
Privacy and data handling
Industry-specific standards
Some licences cannot be transferred and must be obtained by the buyer. Others may be affected by a change in control.
The buyer should know before closing whether the business can legally continue operating without interruption.
Investigate Claims, Insurance, and Disputes
The buyer should request information about:
Existing lawsuits
Threatened claims
Customer complaints
Regulatory investigations
Employment disputes
Tax audits
Warranty claims
Product liability concerns
Insurance claims
Demand letters
Settlement agreements
Insurance policies should be reviewed to determine the scope of coverage, exclusions, deductibles, claims history, and whether replacement coverage will be available after closing.
The purchase agreement should address responsibility for claims relating to events that occurred before the transaction.
Turn Due Diligence Findings Into Contractual Protection
Due diligence is valuable only if its findings affect the transaction.
Depending on what is discovered, the buyer may:
Renegotiate the purchase price
Exclude a liability or asset
Require a debt to be repaid
Require a lien to be discharged
Request a purchase-price holdback
Require third-party consent
Add a closing condition
Request a specific indemnity
Expand a representation or warranty
Require corrective action before closing
Change from a share purchase to an asset purchase
Withdraw from the transaction where legally permitted
Representations and warranties are not a substitute for investigation. They provide contractual remedies if a statement is untrue, but enforcing those remedies may require time, expense, and litigation.
The strongest approach combines appropriate due diligence with clearly drafted purchase terms.
Delta Law’s corporate law services can assist with transaction structuring, legal due diligence, corporate record reviews, closing documents, and post-closing corporate changes.
Common Due Diligence Mistakes
Reviewing only the financial statements
Financial statements do not reveal every contractual, legal, employment, regulatory, or ownership risk.
Waiting until shortly before closing
Important consents, regulatory approvals, financing arrangements, and corporate corrections can take time.
Accepting verbal explanations
Material statements should be supported by appropriate records and reflected in the purchase agreement where necessary.
Failing to identify key dependencies
The business may depend heavily on one customer, supplier, employee, shareholder, licence, or lease.
Ignoring assignment and change-of-control clauses
A critical agreement may not continue automatically after the transaction.
Assuming all assets belong to the company
Websites, trademarks, vehicles, equipment, and intellectual property may be owned by shareholders, contractors, or related companies.
Failing to coordinate legal and financial reviews
Legal, accounting, tax, financing, and operational findings often affect one another.
Advisers should understand the proposed transaction structure and communicate material concerns before the agreement becomes unconditional.
For more information about commercial agreements, corporate transactions, and legal planning for Ontario businesses, visit Delta Law’s legal resources.
This article provides general information only and does not constitute legal, tax, accounting, employment, or financial advice. The appropriate due diligence process depends on the nature of the business, the proposed transaction structure, and the particular circumstances of the buyer and seller.
Investigate Before You Commit
Due diligence allows a buyer to test the assumptions behind a proposed business purchase before committing significant funds.
A careful investigation can identify hidden liabilities, confirm ownership of important assets, uncover consent requirements, and provide the information required to negotiate effective contractual protection.
Delta Law assists Ontario business buyers and sellers with legal due diligence, letters of intent, asset purchase agreements, share purchase agreements, commercial contracts, and transaction closings.
