Due diligence

Checking what you are actually buying.

What to verify before you close — financial, legal, employment, operational and regulatory — and what a genuine red flag looks like.

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What should I check before buying a business?A thorough buyer checks financial statements, tax filings and CRA standing, corporate status and any liens or executions against the business, key contracts, employee obligations, licences, and any legal or environmental exposure. Each area can uncover deal-breaking problems that a seller’s own summary won’t mention.
How do I verify a seller’s financial statements?Cross-check the financial statements against the business’s tax returns, bank and merchant statements, and payroll records rather than relying on the numbers as presented. Inflated add-backs for discretionary or one-time expenses are one of the most common ways reported profit overstates what a buyer will actually take home.
What do I do if I find a problem during due diligence?Stop and get the problem properly assessed before deciding anything. Most purchase agreements include a due diligence condition that lets you renegotiate price, request a holdback, ask the seller to fix the issue before closing, or walk away without penalty — which option makes sense depends on how serious the problem is.
How do I check a business for hidden debt?Run a lien and execution search against the business and its owner, request confirmation of the seller’s CRA standing, and cross-check the balance sheet against bank and loan statements rather than relying on the seller’s disclosure alone. Undisclosed debt is one of the most common reasons buyers regret a deal, and most of it is discoverable before closing.
What financial records should I ask a seller for?Ask for at least two to three years of accountant-prepared financial statements, the matching corporate tax returns and notices of assessment, bank and merchant statements, the general ledger, and aged receivables and payables. Together these let you check what the seller reports against what actually moved through the business.
How do I check whether a business actually makes money?Compare three independent records against each other: bank deposits, point-of-sale or sales-system reports, and the tax return. When all three line up over a full business cycle, reported profit is far more credible than a single spreadsheet the seller prepared specifically for the sale.
How do I verify a business’s cash sales?Verify cash sales by comparing daily point-of-sale or register reports against bank deposit timing, checking that the ratio of cash to card sales stays consistent over time, and cross-checking reported sales against cost of goods sold. No single check proves cash revenue, but consistency across several is meaningful.
What tax filings should I review before buying?Review at least two to three years of corporate income tax returns and notices of assessment, HST or GST returns, and payroll remittance records. Each reveals something different — declared income, revenue consistency, and outstanding employee-related liabilities — and together they show whether the business has clean standing with the CRA.
How do I check for liens on business assets?Run a personal property security search against the corporation, and where relevant the individual owner, to reveal registered security interests over equipment and other movable assets. Pair that with a corporate execution and judgment search, and confirm which registrations the seller is discharging as part of closing.
How do I verify a seller’s customer list?Cross-check the customer list against the invoicing or CRM system it came from, confirm a sample of listed customers transacted recently rather than years ago, and check whether key customer contracts are assignable to a new owner. Where the list includes personal information, also confirm the seller has a lawful basis to transfer it.
What should I check in the lease before buying a business?Read the assignment clause, the remaining term and renewal options, the rent and any escalation schedule, the permitted use, and whether the current owner has given a personal guarantee. For a location-dependent business, an unfavourable lease can undermine an otherwise sound purchase, so review it early.
How do I assess equipment condition before buying?Ask for maintenance and service records, confirm which equipment is owned outright versus leased or financed, and get an independent appraisal or inspection for anything central to how the business operates. Where the business runs vehicles, its commercial vehicle registration history is another concrete record worth checking.
What environmental checks do I need before buying a business?An environmental check is warranted whenever the business or its premises involve fuel storage, industrial processes, dry cleaning, vehicle repair, manufacturing, or a historical use that could have contaminated the site. A Phase I environmental site assessment reviews records and site conditions to flag that risk before you take on the property or its liability.
How do I check a business’s online presence and reviews?Confirm who actually owns and administers the Google Business Profile, social media accounts and website, since a strong online presence is worthless if it does not transfer with the sale. Check review timing for patterns that suggest inflation, and assess how dependent the business is on a single platform or ranking.
What insurance history should I review before buying?Request the claims history from the seller's insurer, current policy declarations pages, and a workers' compensation clearance certificate confirming the account is in good standing. A rising claims trend, a coverage gap, or an outstanding compensation balance are all worth understanding before you take on the risk that produced them.
How do I check a business’s supplier relationships?Ask for written supply agreements where they exist, understand how much of cost of goods sold comes from a single supplier, and check whether key agreements are assignable to a new owner. Where arrangements rest on a personal relationship rather than a contract, treat that as a real risk to account for, not a detail to overlook.
What does a genuine red flag in due diligence look like?A genuine red flag points to an undisclosed liability, a number that cannot be reconciled after a real attempt, or a dependency the seller has not been upfront about — not simply disorganized records or a document a small business owner never had reason to keep. The distinction is whether a gap can be explained and closed, or points to something being concealed.
How much does due diligence cost when buying a business?Due diligence cost is driven mainly by which advisors are engaged and how complex the business is — a straightforward retail business with clean records needs far less review than one with real estate, regulated licences, employees, or records that need real reconstruction. There is no fixed figure, because the scope of review should match the size and risk of the purchase.
Can I do due diligence myself, or do I need advisors?A buyer can reasonably do a meaningful amount of due diligence alone — reading documents closely, visiting the business, checking its online presence and talking to the seller. But reviewing financial statements and tax filings properly needs an accountant, and confirming title, contracts and legal risk needs a lawyer, since both call for professional judgment and, in places, a licence to do the work at all.
What should I read before signing a franchise transfer agreement?Before signing anything binding on a franchise resale, read the current franchise agreement the franchisor is actually offering you — not the seller’s old one — the transfer or assignment agreement itself, any personal guarantee you are being asked to sign, and whatever disclosure document the franchisor provides, because each of these can contain different terms than what you negotiated with the seller on price.
How long does due diligence take?Due diligence has no fixed length in Canadian law; it can move quickly on a small, simple business with clean records and drag on for months on a larger or more complex one, and the biggest single factor is usually how organized the seller’s records already are.
What if my landlord won’t give an estoppel certificate?A landlord who refuses or delays an estoppel certificate is a genuine closing risk, since neither the buyer nor their lender can otherwise confirm the lease’s true terms independently. The usual fallback is a detailed certificate from the seller instead, backed by an indemnity, while pressing the landlord and building extra time into the closing schedule.
What is a CAM reconciliation, and who is responsible for it?A CAM reconciliation is a landlord’s year-end comparison of the estimated common area charges a tenant paid through the year against what those shared costs actually turned out to be, with the difference billed or credited afterward. Because it often lands months after the period it covers, a sale can leave the true-up bill on a buyer’s desk for a period that was mostly the seller’s.
Does a business that owns its land need an environmental assessment?A business that owns its real estate carries an environmental exposure a tenant does not, because contamination liability under provincial environmental law generally attaches to the current owner of land regardless of who caused it. A buyer’s lender will often require at least a Phase I environmental assessment before financing against that property, whatever the operating history looks like.
Does zoning matter when a business sale includes real estate?Zoning matters independently of the lease, because a municipality’s zoning bylaw controls what uses are legally permitted on a property regardless of what the owner has been doing, what a lease’s permitted-use clause says, or what the buyer intends to run. A use that has continued for years without complaint can still be technically non-conforming, so a buyer planning any change should confirm zoning first.
Does a month-to-month tenancy affect the sale of a business?Operating on a month-to-month tenancy after a fixed lease term expired leaves no committed term for a buyer to rely on, which typically makes the business harder to finance since a lender has nothing fixed to underwrite, and lets the landlord end the tenancy on short notice. A buyer should treat securing a proper new lease as a condition of the purchase, not an afterthought.
How do I know if a seller is hiding something?Watch for evasive or inconsistent answers to direct questions, reluctance to let you verify what you have been told independently, and information that only appears once specifically demanded rather than offered upfront. One evasive answer is not proof of concealment, but a consistent pattern across several separate questions is a genuine warning sign worth acting on.
What if the financials do not match the tax returns?A gap between the financial statements a seller shows you and the tax returns actually filed with the CRA can have an innocent explanation, such as accounting-method differences or personal expenses run through the business, but it always needs to be reconciled before you rely on either number. An unexplained or widening gap is one of the more serious findings a buyer can encounter.
How much customer concentration is too much?There is no fixed percentage that makes customer concentration automatically disqualifying, but a single customer or a small handful accounting for a large share of revenue changes how a lender, valuator and buyer all price the business, because losing that one relationship threatens a disproportionate share of future earnings.
How do I check a business for unpaid taxes?Ask the seller to request a clearance certificate or equivalent confirmation from the Canada Revenue Agency covering corporate income tax, GST or HST, and payroll remittances, and build confirmed tax standing into the purchase agreement as a condition of closing.
What if the equipment turns out to be worn out?Worn equipment discovered during diligence is a negotiating input, not automatically a reason to walk away — get an independent estimate of remaining life and replacement or repair cost, then use that figure to adjust price, request a holdback, or make repair a condition before closing.
What if there are no written contracts with key customers?A relationship with no written contract behind it is not automatically worthless, but it is genuinely harder to verify and less durable through a change of ownership than a signed agreement, so treat it as a real risk to investigate and price — through direct conversations, a longer trailing history, and, where possible, formalizing the relationship before or shortly after closing.
What if staff have been paid off the books?Wages paid outside the books mean unremitted source deductions, understated payroll costs, and employee entitlements calculated on the wrong figure — all of which can become the buyer’s problem, since a successor business can face liability for unremitted amounts and employees keep their statutory entitlements regardless of how they were paid.

Checking what you are actually buying.

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