M&A Due Diligence in Canada: What Buyers and Sellers Should Examine

A generic checklist is a useful starting point, but it should not determine the entire process. A share purchase exposes the buyer to the company’s existing assets, obligations and history. An asset purchase may allow greater selectivity, but contracts, licences, employees, permits and customer relationships may still need to be transferred.

The diligence plan should reflect the reasons for the acquisition and the factors that could undermine them. If customer relationships drive value, customer concentration, churn and assignability deserve particular attention. If proprietary technology matters, ownership of intellectual property and cybersecurity become central. If the purchase is highly leveraged, sustainable cash flow and working capital may be the most important questions.

Before opening the data room, the buyer should identify the investment thesis, materiality thresholds, decision makers, specialist advisors and issues that could change the price, structure or willingness to proceed.

Legal diligence confirms ownership, authority and contractual rights while identifying obligations that may survive or be triggered by the transaction. Tax diligence examines filings, exposures and the consequences of the proposed structure. Qualified legal and tax advisors should lead these workstreams.

Common legal and tax questions

• Is the corporate organization complete, current and properly authorized?
• Who owns the shares, assets and intellectual property being acquired?
• Do important contracts contain change-of-control, assignment or termination provisions?
• Are there pending claims, threatened disputes, warranties or environmental exposures?
• Are employment agreements, incentive plans and contractor arrangements properly documented?
• Have income, payroll, sales and other tax obligations been filed and paid?
• Could the transaction structure create unexpected tax liabilities or transfer requirements?
• Are licences, permits, privacy obligations and industry-specific requirements in good standing?

Competition-law review may also be required. The Competition Bureau notes that it may review mergers and acquisitions of any size, while transactions meeting statutory criteria may require pre-merger notification. Its merger-review overview explains the Canadian framework. Parties should obtain legal advice on whether the rules apply to their transaction.

Operational diligence examines whether the business can deliver its products or services consistently and whether important capabilities will transfer to the buyer.

• Dependence on the owner, key employees or undocumented knowledge
• Capacity, bottlenecks, quality control and maintenance requirements
• Facilities, equipment condition and required capital spending
• Employee retention, compensation, benefits and succession
• Health and safety practices and material workplace issues
• Information systems, licences, integrations and technical debt
• Cybersecurity controls, prior incidents, backups and business continuity
• Ownership and protection of software, data and other intellectual property

A profitable business can still be difficult to transfer if customer relationships, approvals or operating knowledge reside almost entirely with the seller. The transition plan should identify who performs essential functions today, who will perform them after closing and what support is required from the seller.

Seller preparation should begin before an exclusivity period creates pressure. A well-organized data room does not eliminate scrutiny, but it can reduce avoidable delays and demonstrate that management understands the business.

• Reconcile financial statements, tax returns and management reporting.
• Document EBITDA adjustments and retain supporting evidence.
• Update corporate records, material contracts and employee agreements.
• Identify change-of-control and consent requirements.
• Prepare customer, supplier and employee concentration analyses.
• Document recurring capital expenditures and working-capital patterns.
• Resolve expired agreements, ownership gaps and incomplete records where possible.
• Prepare a clear explanation for known risks rather than hoping they will not be found.
• Set data-room access controls and a disciplined question-response process.

Sellers should also decide which information is too sensitive to disclose early. Customer names, pricing, employee details and competitively sensitive data may require staged disclosure, redaction, clean-team procedures or release only after the buyer has met specific conditions.

For a broader readiness framework, see Selling a Business in Canada.

Before concluding diligence, the buyer and its advisors should be able to answer the following questions:

1. Have reported earnings and cash flow been reconciled and normalized?
2. What level of working capital and recurring capital expenditure will the business require?
3. Are key customers, suppliers, employees and contracts likely to remain after closing?
4. Does the company own or control the assets, data and intellectual property required to operate?
5. Are material legal, tax, regulatory, environmental and cybersecurity risks understood?
6. Can management execute the transition and the post-closing plan?
7. Do the purchase agreement and financing structure reflect the findings?
8. What unresolved matters could still delay or prevent closing?

BDC also provides a downloadable due-diligence checklist for buyers. No checklist replaces judgement: the most important issue is often the one specific to the company, industry or transaction.

Considering an acquisition, sale or ownership transition? Start a confidential conversation with CFM. We can help connect transaction strategy, financial analysis and financing considerations while coordinating with the appropriate legal, tax and specialist advisors.