Due diligence is the investigation a buyer carries out before committing to a transaction, confirming that the business, property, or asset really is what the seller says it is. Ontario law expects you to do this homework, because most problems discovered after closing become your problems. This guide explains the main types of due diligence, how the process works step by step, and what it looks like in a business purchase and a real estate purchase in Ontario.
What Is Due Diligence?
Due diligence is the structured review of a business, property, or asset that a buyer performs before closing a deal. The purpose is simple. You verify the facts you have been given and you look for the facts you have not been given, so the price you pay reflects what you are actually getting.
The term comes from the idea of taking reasonable care before a decision. In practice it has two sides. Confirmatory due diligence checks that the financial statements, contracts, and representations match reality. Investigative due diligence hunts for what nobody mentioned, such as a lien registered against the equipment, a lawsuit working its way through the courts, or a work order sitting against a building.
Due diligence usually happens inside a protected window. In a business deal that window is set by the letter of intent or by conditions in the purchase agreement. In a real estate deal it lives in the conditions of the agreement of purchase and sale, such as a financing condition, an inspection condition, or a status certificate review condition for a condominium. Until you waive those conditions, you can renegotiate or walk away based on what the review finds.
Why Due Diligence Matters in Ontario
Ontario transactions still run on the old principle of buyer beware. With limited exceptions, a seller is not obligated to volunteer every problem, and a court will expect you to have protected yourself through your own searches and through the conditions and warranties in your contract. A representation from the seller is only as valuable as the seller’s ability to pay if it turns out to be false, which is why verification beats reassurance every time.
Ontario also removed one of the few statutory backstops buyers used to have in asset deals. The Bulk Sales Act, which had governed sales of business assets in bulk since 1917, was repealed on March 22, 2017 under the Burden Reduction Act, 2017. Since that repeal, a buyer of business assets cannot lean on that regime for protection against the seller’s unpaid creditors. The practical result is that lien searches under the Personal Property Security Act, careful contract drafting, and holdbacks or indemnities now carry the weight that statute once did.
In our practice, the most expensive problems are the ones a two week due diligence review would have caught. Nobody enjoys paying for searches, but every search is cheaper than the surprise it prevents.
Demet Altunbulakli, Founder and Managing Lawyer, Insight Law Professional Corporation
The Main Types of Due Diligence
Due diligence is not one review. It is a set of parallel reviews, each aimed at a different category of risk. The scope depends on the deal. A share purchase of an operating company needs almost all of them, while a purchase of vacant land may need only three or four.
| Type | What it examines | Common red flags |
|---|---|---|
| Legal | Corporate records, contracts, licences, litigation, liens, regulatory compliance | Missing minute book, lawsuits, unregistered ownership changes, contracts that die on a change of control |
| Financial | Financial statements, revenue quality, receivables, debt, working capital | Revenue concentrated in one customer, receivables that never collect, undisclosed loans |
| Tax | Income tax, HST filings and remittances, payroll source deductions | Arrears that follow the business, missed HST remittances, aggressive positions under review |
| Operational | Equipment, inventory, suppliers, processes, key person dependence | Leased equipment presented as owned, a business that cannot run without the seller |
| Human resources | Employment agreements, payroll, vacation and overtime liabilities, terminations | No written contracts, unpaid vacation accruals, misclassified contractors |
| Real property and title | Ownership, mortgages, easements, zoning, work orders, leases | Encroachments, open permits, uses that violate the zoning bylaw |
| Environmental | Site history, contamination risk, storage tanks, compliance orders | Former industrial or fuel uses, contamination that migrated from next door |
| Technology and intellectual property | Trademarks, software ownership, domain names, data and privacy practices | Key software written by a contractor who never assigned rights, unregistered brand names |
Different professionals own different pieces. Your lawyer runs the legal, title, and contract review. Your accountant leads the financial and tax review. Specialized consultants handle environmental assessments and building inspections. Someone has to coordinate all of it against one checklist and one timeline, and in most of our files that coordinating role falls to the lawyer.
Due Diligence When Buying a Business in Ontario
The shape of the review depends on how the deal is structured. If you are still deciding between structures, our guide on share purchases versus asset purchases explains the tradeoff in detail, and our overview of buying a business in Ontario walks through the whole transaction from search to closing.
Share purchase or asset purchase changes the scope
In a share purchase you buy the corporation itself, which means you inherit its entire history. Every contract, every tax year, every past employee, and every claim nobody has filed yet comes with the shares. Due diligence on a share deal is therefore the deepest kind, reaching back through the corporation’s full life.
In an asset purchase you select the assets and, in theory, leave the liabilities behind. In practice several liabilities can follow the assets anyway. A security interest properly registered under the Personal Property Security Act stays attached to the equipment it secures. Under the Employment Standards Act, 2000, employees you keep on carry their years of service with them, so their notice and severance entitlements are calculated as if you had employed them all along. Certain tax obligations can also reach the buyer, which is why in some asset deals we ask the seller for a clearance certificate under section 6 of the Retail Sales Tax Act where the seller holds a permit under that Act. An asset deal narrows your risk. It does not erase it.
The searches and reviews a lawyer runs
On a typical Ontario business purchase, the legal due diligence at our firm includes the items below, scaled to the size of the deal.
- A corporate profile report and certificate of status through the Ontario Business Registry, confirming the corporation exists, is active, and is dealing with the people who actually control it.
- A review of the corporate minute book, confirming share ownership, director appointments, and that past transfers were properly documented. A messy or missing minute book is one of the most common problems we find.
- Lien searches under the Personal Property Security Act against the corporation and its business names, revealing registered security interests over equipment, inventory, and receivables.
- Writ of execution searches through the sheriff’s office, showing unpaid judgments that could attach to the assets.
- Litigation searches for claims filed against the seller, and bankruptcy and insolvency searches.
- A review of material contracts, leases, and licences for assignment restrictions and change of control clauses. A key contract that terminates when ownership changes can quietly remove the value you are paying for.
- An employment review covering written agreements, accrued vacation, and any misclassified contractors, since those obligations follow the business under the Employment Standards Act, 2000.
- HST review with your accountant, including whether the parties can elect under section 167 of the federal Excise Tax Act to close the asset sale without HST changing hands, where the conditions for that election are met.
Due Diligence When Buying Real Estate in Ontario
Real estate due diligence splits into what is on title and what is not. Our real estate lawyers in Toronto run both sets of searches on every purchase file, because the most expensive problems are usually the ones that never appear on title at all.
- A title search confirming ownership and revealing registered mortgages, liens, easements, and restrictive covenants.
- Off title searches, including property tax status, utility arrears, outstanding work orders, open building permits, and zoning compliance with the municipality. An order to comply or an open permit becomes your problem the day you close.
- For a condominium, a status certificate review. Under the Condominium Act, 1998, the corporation must deliver the certificate within 10 days of receiving a written request and the fee, and the fee is capped at 100 dollars including taxes. The package shows the reserve fund, the budget, arrears on the unit, special assessments, and any lawsuits involving the corporation. We review it before you waive your condition, never after.
- For commercial and industrial property, environmental review. A Phase One environmental site assessment examines the site’s history, and a Phase Two involves physical testing where the history raises concerns. Contamination can wipe out the value of a property and limit what you can build on it.
- For income properties, a review of the leases and tenancies you are inheriting, since the tenants come with the building.
- Title insurance, which responds to certain defects, fraud, and some off title problems that even careful searches cannot always catch.
How Much Does Due Diligence Cost?
Cost scales with scope. A targeted search package with a short written report on a straightforward matter typically runs from $600 to $1,200+ in legal fees plus the government search charges. Full legal due diligence as part of a small business purchase is usually built into the transaction fee, which commonly falls between $3,000 and $6,000+ plus disbursements depending on the structure and the volume of documents, with share purchases at the higher end.
How Long Does Due Diligence Take?
The honest answer is that it depends on the deal, but the ranges below reflect what we typically see in our files. The clock is usually driven by how quickly the seller produces documents and how quickly search results come back.
| Transaction | Typical due diligence window |
|---|---|
| Resale condominium purchase | About 2 weeks, driven largely by the 10 day status certificate delivery period |
| Residential freehold purchase | 1 to 2 weeks within the conditional period |
| Small business asset purchase | 30 to 60 days |
| Share purchase or larger acquisition | 60 to 120 days from letter of intent to closing, with due diligence running through much of it |
| Commercial or industrial property | 30 to 90 days, longer where a Phase Two environmental assessment is needed |
Larger acquisitions follow their own rhythm. Our mergers and acquisitions page explains how due diligence fits into the full deal timeline from letter of intent to closing.
Frequently Asked Questions
Is due diligence legally required in Ontario?
No statute forces a buyer to investigate before purchasing a business or property. The law simply lets you live with the consequences of not investigating. Because Ontario transactions still operate on buyer beware, courts expect purchasers to protect themselves through searches and contract conditions, and a buyer who skipped both will find very little sympathy afterward. Lenders are a separate matter, since a bank financing your purchase will usually require key pieces of due diligence, such as an appraisal, title work, or environmental reports, before advancing funds.
What is a due diligence period?
It is a negotiated window, set out in the letter of intent or in the conditions of the purchase agreement, during which you can investigate and still renegotiate or walk away. Before the window closes you must either waive your conditions, which makes the deal firm, or decline to waive them, which typically ends the deal and returns your deposit under the terms of the agreement. The length is negotiable, and how much window you can get depends on your bargaining position.
Who pays for due diligence?
The buyer almost always pays for the buyer’s own due diligence, including legal fees, accounting fees, searches, and inspections. There are pockets where practice differs. In a resale condominium purchase the seller often orders and pays for the status certificate as part of preparing the listing, although the parties can negotiate this. Sellers also carry their own costs of responding, such as assembling the data room and answering requisitions.
What happens if due diligence uncovers a problem?
Most findings lead to a renegotiation rather than a dead deal. Depending on the problem, the usual tools are a price reduction, a holdback of part of the purchase price until the issue is resolved, a specific indemnity from the seller, or a requirement that the seller fix the issue before closing. If the problem is serious enough, and your conditions are still open, you can walk away. What you cannot easily do is complain about a discoverable problem after you have waived your conditions and closed.
Can I do due diligence myself?
You can and should do parts of it. Visiting the business, talking to customers, reviewing the neighbourhood, and studying the industry are things a buyer does better than any advisor. The searches are a different story. Title searches, lien searches under the Personal Property Security Act, writ searches, litigation searches, and minute book reviews require access to the right systems and the experience to read what comes back. The pattern we see is that buyers who do everything themselves miss the registered problems, and those are usually the expensive ones.
How is due diligence different for a franchise purchase?
Everything in this article still applies, and one more layer is added. Ontario franchise law requires most franchisors to give a prospective franchisee a franchise disclosure document, and the review of that document, the franchise agreement, and the franchisor itself becomes part of the due diligence. Our guide to the franchise disclosure document covers what that review looks for.
The information provided above is of a general nature and should not be considered legal advice. Every transaction or circumstance is unique, and obtaining specific legal advice is necessary to address your particular requirements. Therefore, if you have any legal questions, it is recommended that you consult with a lawyer.
