Buying a Business in Ontario: Due Diligence Guide

Why Due Diligence Is the Most Important Step

Due diligence is the process of thoroughly investigating a business before purchasing it. In Ontario, the maxim "buyer beware" (caveat emptor) generally applies to business acquisitions — once you close, you are responsible for most liabilities you did not contractually allocate to the seller.

Financial Due Diligence

• Review at least 3 years of financial statements (ideally audited or reviewed by an independent accountant)
• Review corporate tax returns for the same period
• Verify revenue, gross margins, and normalized EBITDA
• Identify any irregular or one-time items that inflate or depress historical profitability
• Review accounts receivable aging and customer concentration risk
• Review accounts payable and any contingent liabilities

Legal Due Diligence

• Review all material contracts (customers, suppliers, leases, licences)
• Review employment agreements and any outstanding employment law disputes
• Review intellectual property ownership (trademarks, patents, copyrights)
• Search for PPSA registrations, liens, and judgments against the business
• Review corporate minute book and confirm proper corporate status
• Review any regulatory licences and confirm they are transferable

Red Flags That Should Give You Pause

• Significant revenue concentration in one or two customers
• Key employees who may not stay after the sale
• Contracts that cannot be assigned without third-party consent
• Outstanding CRA assessments or payroll tax arrears
• Seller's inability to explain historical financial fluctuations

Working With Advisors

A business acquisition typically requires: a business lawyer (purchase agreement, due diligence, closing), an accountant (financial due diligence, tax planning), and possibly a business broker (valuation, finding the business). Do not attempt a significant acquisition without experienced professional guidance.