A buyer’s checklist
Buying a small business in Ontario: what to check first
Diligence is everything you find out before you are committed. This is what to ask for, what to compare it against, and which questions belong to your lawyer or your accountant. It is general information, not legal or tax advice, and it applies whether you buy on MicroM&A or anywhere else.
01
The money
The figures in a listing are the seller's. Diligence is checking them against records the seller did not write for you.
Three years of financial statements, and the tax returns filed with them
Ask for the statements and the corporate (T2) or personal (T1) returns for the same years, with the CRA notices of assessment. Figures that differ between what was shown to you and what was filed with the CRA need an explanation.
Bank statements against reported revenue
Twelve months of business bank statements should broadly account for the revenue in the statements. Cash businesses are where the two drift apart.
HST returns
Sales reported on HST returns are a second, independent record of revenue. A registrant's filings should line up with the income statement.
Every addback, one by one
Owners add back personal expenses and one-off costs to show what the business earns for a new owner. Ask what each one is, see the receipts, and decide whether it really goes away when the seller does.
Revenue by month and by customer
Monthly figures show seasonality and trend that annual totals hide. If one customer is a large share of revenue, find out whether that relationship survives the sale.
02
What you are buying
Most small businesses change hands as an asset sale: the buyer takes the equipment, inventory, name, phone numbers and goodwill, and generally not the seller's corporation or its history. In a share sale the buyer takes the company itself, liabilities included. Ask your lawyer which you are doing before anything else.
An equipment list, with condition and age
Everything included should be written down, because whatever is not listed is arguably not sold. Look at the equipment; ask what is leased rather than owned.
A search for liens
Equipment can secure a loan the seller owes. In Ontario, registered security interests in personal property are searchable through the Personal Property Security Registration system. Your lawyer will make sure anything registered is discharged at closing.
Inventory, counted at closing
Inventory changes daily. Agree how it is counted and valued on the closing date rather than relying on a number from months earlier.
The name, website, phone numbers and accounts
Check who owns the domain, the social accounts and the listings on review sites, and that they are part of the sale.
03
The premises
For a business that runs from a rented location, the lease can matter as much as the business.
How long the lease has left, and any renewal options
A profitable business with eighteen months left on its lease and no right to renew is a different purchase from one with ten years.
Whether the lease can be assigned to you
Most commercial leases need the landlord's consent to assignment. Find out what the landlord will ask for (a personal guarantee, financial statements, a higher rent) before you are committed.
If the land and building are included
A title search, the zoning, and any building or environmental reports. Your real estate lawyer handles title; an inspector and, for some properties, an environmental consultant handle the rest.
04
People, licences and contracts
The parts of a business that do not appear on a balance sheet.
Employees
Under Ontario's Employment Standards Act, employees a buyer keeps on after a sale generally carry their length of service with them, which affects notice and severance later. Ask for a list of staff, their pay and their start dates.
Licences and permits
Some licences do not transfer with the business and the buyer has to apply in their own name: a liquor licence, for example, or a regulated trade's. Find out which ones the business needs and how long getting your own takes.
Supplier, customer and franchise agreements
Some contracts need the other side's consent to transfer. A franchise usually needs the franchisor's approval of the buyer.
Outstanding claims and accounts
Ask about lawsuits, disputes and amounts owed to the CRA or the WSIB. In an asset sale your lawyer can ask for clearances, such as a WSIB clearance certificate, so the seller's arrears do not follow the business to you.
05
Tax at closing
Three that come up on most Ontario purchases. Your accountant and lawyer will tell you which apply.
HST and the section 167 election
When a registrant buys all or substantially all of the assets needed to carry on a business, buyer and seller can usually elect under section 167 of the Excise Tax Act so that no HST is paid on the sale.
Land transfer tax
If land or a building is part of the purchase, the buyer pays Ontario land transfer tax on that part, and Toronto adds its own.
How the price is split
The price is allocated between equipment, inventory, goodwill and any real property. The split affects both sides' taxes, which is why it is agreed in writing.
06
Financing
Settle how you will pay before you commit, not after.
A lender's commitment, in writing
Banks lend for business purchases, including under the federal Canada Small Business Financing Program, and BDC lends specifically for acquisitions. A pre-approval is not a commitment: ask what conditions are left.
Seller financing
Some sellers will take part of the price over time, called a vendor take-back. It is a loan from the seller, with its own terms and security, and it should be in the agreement.
Where this fits on MicroM&A
Every listing here is sold by auction, and bids are unconditional: there is no financing or inspection condition after you win. So all of the above happens during the diligence period, before bidding opens. Sign the seller’s confidentiality agreement to read the information package, ask your questions in the auction’s forum, and have your lawyer, accountant and lender lined up before you register to bid. You get at least three days’ notice of the date bidding opens.
How an auction runs, step by step: how it works and the auction rules.