You have found the business you want to acquire. The letter of intent is signed, the price agreed to in principle, the enthusiasm very real. Then comes a step that too many buyers treat as a mere formality: due diligence.
Yet it answers the only question that truly matters: does what you are being sold match what you think you are buying?
A business transaction engages the Business Corporations Act, the Civil Code of Québec for the sale itself, and filings with the Registraire des entreprises du Québec.
What is due diligence really for?
Due diligence is the methodical review of the target business before the transaction closes. Its purpose is not to hunt for reasons to call everything off: it is to test the picture presented by the seller against the documented reality.
Three outcomes are possible. The picture is confirmed, and the transaction closes on the agreed terms. Gaps come to light, and the buyer negotiates a price adjustment or additional warranties. Or a major discovery justifies walking away before it is too late.
When does it take place?
Due diligence sits between two milestones: the letter of intent, which sets out the broad terms of the deal and usually grants a period of exclusivity, and the definitive purchase agreement, which seals the transaction. It is during this window that the buyer and their advisors go through the business with a fine-tooth comb.
Signing the definitive agreement without completing this review is buying with your eyes closed. Negotiating it on the strength of the due diligence findings is buying with full knowledge of the facts.
The key areas to review
Every transaction calls for its own program, but certain areas come up almost every time:
- Corporate: an up-to-date minute book, the shareholder register, resolutions authorizing the sale. An incomplete minute book is often the first sign of poor record-keeping.
- Contracts: leases, client and supplier agreements and, above all, change-of-control clauses, which can allow a key counterparty to terminate its agreement at the very moment the business is sold.
- Employees: employment contracts, compliance with labour standards, pending claims and, a point too often overlooked, the retention of the key people without whom the business loses its value.
- Litigation and compliance: pending or threatened lawsuits, permits and licences, environmental obligations.
- Ownership of assets: titles of ownership, charges registered in the RDPRM (Québec’s Register of Personal and Movable Real Rights), intellectual property actually owned by the business.
- Tax and financial: led by the accountants, this area covers the financial statements and tax assessments, among other things, in coordination with the legal team.
Key takeaways before you close
The key areas
Corporate, contracts, employees, litigation, assets, tax: any one of them can hide the gap that changes the value of the business.
The scope of the review is calibrated to the size of the transaction and the risks specific to the industry.
Shares = the entire past
Buying the shares means taking over the corporation with its entire history, including its debts and lawsuits, known or not.
The review must then dig deeper, and the seller’s warranties must be stronger.
The concrete outcome
Due diligence leads to tangible results: an adjusted price, warranties and indemnities, closing conditions, holdbacks on the sale price.
Each finding becomes a bargaining lever in the purchase agreement.
Share purchase or asset purchase: two levels of risk
The scope of the review depends directly on the structure of the transaction. In a share purchase, the buyer takes over the legal entity as is: the corporation’s entire past follows, including obligations that appear in none of the documents provided. In an asset purchase, the buyer selects the items being acquired, which limits exposure to the company’s past without eliminating it.
That is why due diligence for a share purchase is generally more exhaustive: you are not only verifying what you are buying, you are also verifying everything that could follow you.
Sellers: run your own due diligence
Due diligence is not just the buyer’s concern. A seller who prepares the file before going to market (this is vendor due diligence) discovers their own weaknesses while there is still time to fix them: a minute book to reconstruct, verbal agreements to formalize, charges to have discharged.
A well-ordered file speeds up the transaction, inspires confidence and supports the asking price. Conversely, every missing document becomes a bargaining chip in the buyer’s hands.
Why consult a lawyer before buying a business?
Due diligence is not a checklist: it is an exercise in judgment. Knowing what to ask for, recognizing what is out of the ordinary, measuring the true reach of a change-of-control clause or of a charge registered in the RDPRM: that is what separates a useful review from a mere collection of documents.
At Meka Avocat, we guide buyers and sellers through every stage of the transaction: planning the due diligence, analyzing the findings, then turning those findings into concrete protections in the purchase agreement.
Frequently asked questions
What is due diligence for?
To confirm that the business matches what was presented, to put a number on the risks discovered, and to turn those findings into a price adjustment, warranties, holdbacks or closing conditions. It serves to negotiate as much as to verify.
When does it take place?
After the letter of intent, during the exclusivity period, and before the purchase agreement is signed. It is what gives real content to the seller's representations and warranties.
Which areas must be examined?
Corporate records and the minute book, key contracts and the lease, finances and tax, employment, intellectual property, permits and regulatory compliance, pending litigation and insurance.
Should a seller run his own due diligence?
Yes, before going to market. Fixing an incomplete minute book or regularizing an unsigned contract costs little when nobody is looking, and costs a great deal mid-negotiation, when every defect becomes an argument for reducing the price.
Is an acquisition on your horizon?
Whether you are at the letter of intent stage or already deep into due diligence, a consultation helps you target the real risks of your transaction and build the strategy that will protect your investment.
What due diligence reveals shapes everything else: the structure of the transaction, shares or assets, the price, in light of what the business is really worth, and the warranties demanded of the seller, and our mergers and acquisitions practice. If the takeover is part of a business immigration project, see due diligence in a takeover by an immigrant entrepreneur, where the program sets its own conditions on the target business.
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Lawyer, member of the Barreau du Québec since 2014, founder of MEKA AVOCAT. This text sets out general legal information: it describes rules that apply broadly, not the answer to one particular case, and does not replace advice on your situation.
