Buying a business?
Know what to check first.
Pick the deal structure and what the business has. Get a due diligence checklist that fits, tick items off as the seller delivers, and flag what you want to ask your lawyer or accountant.
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· Reviewed by Jonathan Kleiman, J.D.
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Jonathan Kleiman acts for buyers of Ontario businesses, from small owner-operated shops to multi-million dollar deals: due diligence, the purchase agreement and closing.
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How to use due diligence well
Due diligence is your chance to confirm that the business is what the seller says it is, before your money is committed.
- Get the due diligence period and your right to walk away written into the letter of intent or the agreement before you start.
- Ask for documents in writing and keep a record of what you received and when.
- Compare sources against each other. Tax returns, bank statements and sales reports should tell the same story.
- Don't waive a condition while items that matter are still open.
- Turn what you find into terms: a price change, a holdback, or a specific promise from the seller in the agreement.
The buying a business checklist guide walks through the whole purchase from first look to closing. If the business has staff, read what happens to employees when a business is sold. For the tax items, the guide to HST and purchase price allocation explains what to ask your accountant.
Common questions
What is due diligence when buying a business?
It's the buyer's investigation of the business before the deal becomes firm: checking the financial records, contracts, lease, employees, liens and anything else that affects what the business is worth and what you'd be taking on. It usually happens during a conditional period after the letter of intent or the purchase agreement is signed.
How long does due diligence take for a small business?
It depends on the business and on how quickly the seller produces documents. A few weeks is common for a small owner-operated business, and larger or more complicated deals take longer. Agree on a period long enough to finish, with a right to extend if the seller is slow to deliver.
Is due diligence different for an asset purchase and a share purchase?
Yes. In a share purchase you're buying the company with its whole history, so you look harder at corporate records, tax accounts and past liabilities. In an asset purchase you look harder at what transfers: the lease assignment, contract consents, employee offers and licences. The checklist changes when you pick a structure.
What happens if due diligence turns up a problem?
It depends on what the agreement says and how serious the problem is. Buyers usually ask for a price reduction, a holdback, a specific promise or indemnity from the seller, or for the seller to fix the issue before closing. If the agreement has a due diligence condition, the buyer may also be able to walk away. Get advice before you waive a condition.
Can I do due diligence myself?
You can gather documents and ask questions yourself, and this checklist helps you organize that. Reading the lease, the contracts, the lien searches and the tax position for what they actually mean is work for a lawyer and an accountant. Doing the gathering yourself can make their review faster.
Is this checklist legal advice, and is it complete?
No to both. It's general information and a starting point. Every business has its own risks, and some industries have requirements this list doesn't cover. It doesn't review any document, score the deal or tell you whether to buy, and using it doesn't create a solicitor-client relationship.
For discussion only
General information, not legal, tax or valuation advice. This checklist is a starting point and is not complete for every business. It does not review any document or tell you whether to buy. Using this tool does not create a solicitor-client relationship. Have a lawyer and an accountant review the actual documents before you waive conditions or close.