Legal due diligence, step by step

Legal due diligence answers a different question than financial diligence does. It is less about whether the numbers are real and more about whether the thing you think you are buying can actually be transferred to you, cleanly, on the terms you expect. A corporation can have excellent earnings and still carry legal risk — a contract that cannot be assigned without a third party’s consent, a trademark registered to the owner personally rather than the company, an undisclosed lawsuit sitting quietly on the public record. None of that shows up in a set of financial statements, which is exactly why it needs its own dedicated review, usually led by a lawyer rather than an accountant.

Confirm the corporation actually is what it claims to be

Start with a corporate search and a certificate of status, confirming the corporation exists, is in good standing, and is not in the middle of a dissolution, amalgamation or other status change that would complicate a sale. This sounds like a formality and occasionally turns up something that is not: a corporation that has fallen out of good standing for a missed annual filing, for example, needs that cleaned up before closing rather than discovered as a surprise at the lawyer’s desk on signing day.

Read the minute book, not just the financials

The minute book is the corporation’s own record of its major decisions — shareholder resolutions, director appointments, share issuances and transfers — and it is supposed to be complete and current. In practice, minute books for small businesses are very often incomplete, with resolutions never formally documented or share transfers that happened informally years ago and were never properly recorded. Gaps in the minute book are common enough that they rarely kill a deal on their own, but they need to be identified and corrected before closing, because an incomplete corporate record can create real uncertainty about who actually owns what.

Check whether the contracts that matter can actually be assigned

Read every material contract — the lease, key customer and supplier agreements, any franchise agreement — specifically for anti-assignment clauses and change-of-control provisions. A contract that requires the other party’s consent before it can transfer to a new owner is not automatically a problem, but it is a real one if that consent is unlikely, expensive, or slow to obtain, and a buyer who does not check this until after signing a purchase agreement can end up owning a business without the customer contract that made it worth buying in the first place. Start the consent conversations early rather than late — a landlord or a franchisor asked for consent the week before closing has far more leverage to extract concessions than one approached weeks earlier as a routine part of the process.

Search for litigation and judgments before you search for anything else

An execution and judgment search checks the public record for registered judgments against the corporation, which can sit on title to its assets whether or not the seller mentions them. Combine that with a direct question about any active or threatened litigation, and treat both an undisclosed judgment and an undisclosed lawsuit the same way — as a serious problem on two levels at once, because it affects the corporation’s actual legal exposure and it raises real questions about how candid the seller has been about everything else.

Confirm who actually owns the intellectual property

A surprising number of small business trademarks and domain names turn out to be registered personally to the owner rather than to the corporation, and software or other IP built by an outside contractor is sometimes never formally assigned to the business at all. Confirm registered ownership of every trademark and domain the business relies on, and check that any custom-built software or proprietary process actually belongs to the company on paper, not just in practice. The business also holds customer data it collected under Canadian privacy law, and confirming how that data was handled and how it will be handled after the sale is now a standard part of legal review rather than an afterthought.

Check licences, permits and insurance separately from everything else

Sector-specific licences — a liquor licence, a food premises permit, a motor vehicle dealer registration, a transport operator authority — very often do not transfer automatically with a change of ownership and instead require a fresh application under the buyer’s name, sometimes with processing time that needs to be built into the closing timeline. Review insurance history separately as well; a pattern of undisclosed claims can point to operational risks that have not surfaced anywhere else in the diligence process. Build the licence-reapplication timeline into your closing schedule deliberately — a buyer who assumes a permit will simply carry over, only to learn during the week of closing that a fresh application and inspection are required, can find the whole transaction stalled over a step that had nothing to do with the deal itself.

• Corporate search and certificate of status
• Complete minute book, including share register and resolutions
• Copies of all material contracts, including the lease
• Execution, judgment and litigation search results
• Registered ownership records for trademarks, domains and licences