Due Diligence

In a business acquisition, due diligence is the process by which the buyer investigates what they are actually purchasing before they are legally committed to close. Legal due diligence covers: corporate records (minute book, share register, articles and by-laws); material contracts (customer agreements, supplier agreements, leases, employment contracts); intellectual property ownership and registrations; litigation and regulatory history; employment and labour compliance (Employment Standards Act, WSIB, Ontario Human Rights Code); environmental compliance; permits, licences, and regulatory approvals; real property ownership and encumbrances; existing financing and security interests registered on the Personal Property Security Act (PPSA) register; and any government obligations (HST, payroll remittances, corporate income tax). Financial due diligence, conducted separately by accountants, covers the accuracy of financial statements, working capital analysis, tax compliance, and historical cash flows.

In most Ontario business transactions, the process begins after the parties sign a letter of intent (LOI). The seller provides a data room — historically a physical room of documents, now almost always a virtual data room (VDR) accessible online — containing the documents requested by the buyer's legal and financial advisors. The buyer's lawyers work through a due diligence checklist, reviewing documents and flagging issues. The due diligence period is typically 30–90 days, depending on the complexity of the business. At the end of the process, the buyer's lawyers produce a due diligence report summarizing what was reviewed, what was found, and what issues require resolution before or at closing.

Not every due diligence issue is a deal-breaker. Experienced counsel helps buyers distinguish material issues — those that fundamentally affect the value or viability of the transaction — from non-material issues that can be addressed through price adjustments, holdbacks, or additional representations and warranties. A material issue might be an undisclosed lawsuit with a $500,000 exposure; a non-material issue might be a missing annual resolution that can be rectified retroactively. The due diligence findings directly inform the representations and warranties in the purchase agreement and the indemnification provisions that protect the buyer post-closing.

In Ontario, a seller of a business does not have a standalone common law obligation to volunteer information about defects (caveat emptor applies to many commercial transactions). However, a seller who actively misrepresents a fact, or who knows that the buyer is operating under a false impression about a material fact, may be liable for fraudulent or negligent misrepresentation. In practice, the purchase agreement's representations and warranties operate as the primary disclosure mechanism — the seller makes positive statements about the business, and the buyer relies on them. A seller who cannot honestly make a representation must disclose the issue in the disclosure schedules attached to the agreement, which qualify or narrow the scope of the representations.