The listing looks promising. A convenience store near a busy Brampton intersection, a small manufacturer in an industrial unit, or a tutoring centre with steady enrolment, all priced at what seems like a fair multiple of earnings. The seller is friendly and ready to retire. A broker is warning you that another buyer is circling. You want to move fast.
That is exactly the moment to slow down. Due diligence is the process of checking whether the business is really what it appears to be, and it is the buyer’s main protection. When a problem surfaces before closing, you can negotiate, restructure, or walk away. When it surfaces after, you may be left suing someone who has already spent the money, if you have any right to sue at all.
This article provides general information about buying a business in Ontario. It is not legal, tax, or accounting advice. Your advisors should tailor any checklist to the business you are buying.
Start With the Structure: Shares or Assets
Before reviewing a single document, understand that there are two basic ways to buy, because your risk depends on which one you choose.
In a share purchase, you buy the shares of the corporation that owns the business. The company stays the same, and so do all of its assets, contracts, licences, and employees. It also keeps all of its liabilities, including those nobody has told you about, such as an old tax reassessment or a lawsuit from before you arrived.
In an asset purchase, you buy selected assets, such as equipment, inventory, the customer list, and the name, and usually leave the corporation behind with the seller. Generally, you take only the liabilities you agree to assume, although certain obligations can follow the business by law, as we will see. You will have to transfer or re-obtain contracts, licences, and permits, and that takes more work.
Buyers often prefer assets, and sellers often prefer shares, partly because of tax. Tax is a big part of this negotiation, so bring your accountant in early. A deal that looks more expensive on paper could actually be better once you take tax into account.
Letter of Intent and Access
Most deals begin with a letter of intent. It usually sets out the price, the structure, a period for due diligence, and exclusivity, meaning the seller cannot shop your offer around for a set time. Read it carefully. Parts may be binding even if the letter says the rest is not, and a careless sentence could commit you to more than you intended. A confidentiality agreement generally comes first, since the seller is going to show you sensitive information.
Use the letter to establish what you expect to see. Then ask for documents in an organized list, and keep track of what has and has not been delivered. A seller’s reluctance to hand over a particular document can be informative in itself.
Financial Review
Do not rely only on the seller’s summary or a broker’s information package. Have an accountant review at least three years of:
- Financial statements and corporate tax returns
- HST returns and payroll remittances, with confirmation that they are up to date
- Bank statements, to match against reported revenue
- Accounts receivable and payable, with attention to how old they are
- Inventory counts and valuation
- Customer concentration: does one client generate half of the sales?
Be careful with claims along the lines of “the real income is higher than what the books show.” Cash not reported to the Canada Revenue Agency is a risk, not a selling point. You would be paying for income you may not be able to verify, and in a share deal you would be buying the tax exposure that goes with it.
Ask your accountant about “normalized” earnings too. A seller who pays no salary to a spouse who works 40 hours a week has earnings that are overstated from a buyer’s point of view, because you will have to pay someone to do that work.
Searches: What the Public Record Shows
Lawyers run a series of searches to reveal debts and claims. These typically include:
- Personal property security searches under the Personal Property Security Act, showing whether a lender or lessor has registered an interest in equipment, inventory, or vehicles
- Bank Act security, which certain lenders may hold
- Execution searches, showing whether a creditor has filed a writ against the seller
- Bankruptcy and insolvency searches
- Litigation searches, including in the courts where the business operates, such as the Superior Court at 7755 Hurontario Street in Brampton
- Corporate profile and status reports, to confirm that the company exists and is in good standing, and who its directors are
- Land title searches, if real estate is part of the deal
At closing, registered security interests on what you are buying should be discharged, or you should agree to take subject to them on known terms. Searches should be updated just before closing, because things can change during the deal.
One piece of history is worth knowing. Ontario used to have a Bulk Sales Act that imposed specific procedures for asset sales. It has been repealed, so that older process no longer applies. Do not take that as meaning creditors have no remedies, since they may have others, including security interests. Careful searches and contract protections remain important.
Contracts and the Lease
Read every significant agreement, looking for three things: whether it can be transferred, whether it is on favourable terms, and what happens on a change of control.
For most small retail, restaurant, and service businesses, the lease is the most important contract. Check how many years remain and whether there is a renewal option, the rent and any scheduled increases, permitted use, exclusivity, and any landlord consent needed for assignment. In a share deal, a change of control clause may require consent too. The right location may be most of what you are buying. A store with 11 months remaining and no renewal right could be a very different purchase from what the listing suggests. Speak with the landlord early, subject to confidentiality, to find out about any defaults or planned redevelopment. Brampton has seen plenty of plaza and corridor redevelopment over the years, so the landlord’s long-term plans are worth asking about.
Also review supplier agreements, customer contracts, equipment leases, franchise agreements, and any software licences. If the business is a franchise, the franchisor’s approval and its rules will likely shape the entire transaction. Some contracts contain exclusivity or minimum purchase commitments that you may not want to inherit. A lawyer experienced in buying and selling businesses can flag these early.
Employees
Employees are often the business’s real value, and they carry real legal consequences as well.
Ontario’s Employment Standards Act, 2000 has a rule that catches many buyers off guard. Under section 9, if an employer sells a business or part of it and the buyer employs an employee of the seller, that employment is generally treated as continuous for purposes of the Act. So a cashier who worked for the seller for 12 years will carry those 12 years of service to you for calculating termination and severance entitlements. That can apply even in an asset purchase. Courts may also take prior service into account when determining common-law notice.
Review the following:
- A complete employee list, with roles, pay, benefits, start dates, and vacation owing
- Written employment contracts, and whether they would be enforceable
- Any workers classified as contractors who may in fact be employees
- Immigration status and work permit conditions for foreign workers, as a change of employer may have consequences
- Past or current complaints to the Ministry of Labour, the Human Rights Tribunal, or WSIB
- WSIB account status and any clearance certificate available
- Whether a union is involved
Discuss who will terminate anyone you do not intend to keep, and who pays. The contract should deal with this directly.
Licences, Regulations, and Premises
Check that the business has all the permits required to operate lawfully, and whether they can move to you. Depending on the sector, this may include City of Brampton business licences, Peel Public Health inspections, liquor licences through the AGCO, and transport-related permits. Some licences are personal and cannot be transferred, so you would have to apply for your own. Allow enough time, since a gap could shut you down.
Also confirm that the actual use complies with zoning, and look at property conditions. For industrial, auto-related, or dry-cleaning operations, environmental risks can be substantial. An environmental assessment could be a sensible expense if contamination is a realistic possibility.
Intellectual Property, Data, and Technology
Ask who actually owns the business name, logo, website, domain name, social media accounts, and customer lists. Small businesses often have these registered in the personal name of an owner or even a former web designer. Check for trademark registrations and make sure any custom software or content was properly assigned to the company by whoever created it.
A customer database also raises privacy obligations. Personal information may generally be transferred in a business transaction, subject to conditions in federal privacy law, including limits on use and notification after closing. Ask whether the seller has had any data breaches, and how consent for email marketing has been obtained.
Taxes on the Deal
Some tax issues should be discussed before you sign, including:
- How the purchase price is allocated among inventory, equipment, goodwill, and any non-competition covenant, since that affects both sides
- Whether HST applies, or whether a joint election under section 167 of the Excise Tax Act is available when substantially all of the assets of a business are sold
- Whether the seller is a non-resident of Canada, which can trigger withholding requirements
- Land transfer tax if real estate is included
These decisions have deadlines and technical conditions, so let your accountant and lawyer coordinate.
Protecting Yourself in the Agreement
What you learn in due diligence should directly shape the purchase agreement. The key protections are:
Representations and warranties. The seller’s statements about the business, including that the financial statements are accurate, taxes are paid, and there are no undisclosed lawsuits. Negotiate what they cover and how long they last.
Indemnities. The seller’s promise to compensate you for specified losses, particularly matters that arose before closing. Watch for caps, thresholds, and time limits. Parties to business agreements may also be able to vary some limitation periods, so check how the contract treats timing.
Holdbacks and vendor take-back. Retaining part of the price for a period gives you something practical to look to if a claim arises. A promise from a seller who has moved abroad may be worth little without security.
Restrictive covenants. A non-compete from the seller protects the goodwill you are paying for. Ontario’s employment ban on non-competes has a specific exception for some sales of a business where the seller becomes the buyer’s employee immediately afterward, and the covenants still need to be reasonable. Draft with care, especially if the seller will stay on.
Transition. Consider a period in which the seller introduces you to customers and suppliers and stays available to answer questions, with clear terms about pay and duration.
Conditions. Your obligation to close should depend on matters such as financing, landlord consent, and satisfactory due diligence, so you can walk away if something does not check out.
Trust What You Can Verify
Spend time in the business before closing, if the seller allows it. Count customers at different hours. Talk to suppliers, once confidentiality permits. Walk through the equipment with someone who knows how to assess it. Numbers can tell you a great deal, but so can a Tuesday afternoon behind the counter.
And be ready to leave. Time and fees spent investigating a business that you decide not to buy are not wasted, as they cost much less than buying the wrong one. If you are considering a purchase, the firm’s corporate law team can help with the structure, the searches, and the agreement. You are welcome to get in touch before you sign anything, including the letter of intent.