How do I do due diligence when buying a business in Ontario?

Due diligence anywhere means verifying what the seller has told you. In Ontario, several of the checks run through provincial registries and statutes, and those are the focus here. For the general idea, see the glossary entry on due diligence. What follows covers searches your lawyer can run through Ontario systems, a rule about the seller’s employees that a buyer needs to know before hiring them, and one old rule that no longer applies. All of it is Ontario law, so a business in another province needs its own province’s searches and statutes. Your Ontario lawyer should confirm which of these fit your deal.

Search for registered security interests

Ontario’s Personal Property Security Act provides that, on request and payment of the required fee, the registrar issues a certificate for a search of the individual debtor name index, the business debtor name index or the motor vehicle identification number index, stating whether a financing statement or financing change statement is registered under the name or number searched. The Act makes that certificate proof of its contents only in the absence of evidence to the contrary, so treat it as strong evidence rather than a guarantee. Ask your lawyer which names to search, such as the seller’s exact legal name and any prior or operating names, and ask your lawyer to explain what each registration covers and how it will be released at closing.

Check for writs of execution

Ontario’s Execution Act describes writs of execution issued on a judgment, in favour of the person who recovered it. Under section 10(1) of the Act, a writ against personal property binds that property from the time it is filed with the sheriff and entered into the index. Section 10(2) makes an exception: a writ of seizure and sale of personal property issued out of the Small Claims Court is not entered into the index and binds the debtor’s personal property only from the time the property is seized. For a buyer, that means a search of the writs index for the seller’s name can reveal creditors who may have a claim against the assets you are buying. The Act also says such a writ does not prejudice title to personal property acquired in good faith and for valuable consideration, unless the person had notice of the writ when acquiring title (bills of sale and chattel-mortgage-type instruments excepted), so the details matter. Have your lawyer run the search and interpret the result.

Confirm the entity on the Ontario Business Registry

The Ontario government states that most of the information filed on the Ontario Business Registry, such as registered office or other address information, is placed on the public record and is publicly available for searches under the business statutes. Use it to confirm the seller’s legal name, the type of entity and the registered address, and to compare these against what the offer and the contracts say. Administrative details such as filing contact information are not shown on the public record, so a registry search will not tell you everything about the company.

Understand how employees carry over

Ontario’s Employment Standards Act, 2000 says that if an employer sells a business or part of one and the purchaser employs an employee of the seller, the employee’s employment is deemed not to have been terminated for the purposes of the Act, and the time with the seller counts toward later calculations such as length of employment. Subsection 9(2) says this does not apply if the purchaser hires the employee more than 13 weeks after the earlier of the employee’s last day with the seller and the day of the sale. Budget for this continuity when you review payroll records.

Do not look for a Bulk Sales Act step

Older articles still mention Ontario’s Bulk Sales Act, which dealt with a “sale in bulk”, defined as a sale of stock in bulk out of the usual course of business or trade of the seller. The Ontario e-Laws page for the Act states that it was repealed on March 22, 2017. A checklist that tells you to file a bulk sales affidavit is out of date. Repeal does not remove your need to confirm unpaid obligations; it only means this particular statute is no longer the tool. Ask your lawyer which other searches and protections in the purchase agreement now cover that risk.

Verify the numbers

Registry work covers claims against the business. The financial side needs its own check. BDC suggests asking whether the figures match the information you are getting from the owner and whether the tax returns match the financial statements. Where something does not reconcile, ask the seller and the seller’s accountant for an explanation in writing. Reviewing the accounts is covered in a separate guide.

• Ask your lawyer to run PPSA searches under every name the seller has used
• Request a search of writs of execution against the seller and any related entity
• Confirm the legal name, entity type and address on the Ontario Business Registry
• List employees and their start dates to understand the continuity rule
• Reconcile tax returns to financial statements and document any gaps