Toronto business and franchise lawyer Sukhi Hansra, JD, MBA, of Hansra Law walks through the due diligence process stage by stage, including how long it actually takes and how to evidence that you did it.
You have signed a letter of intent, or you are about to, and somewhere in it is a diligence period. Now you have to fill that period with something, and nobody has told you what happens inside it or in what order.
The short version is that the process runs in six stages, most of the elapsed time is spent waiting on other people, and the timelines published by the companies selling deal software are shorter than the ones published by lenders who have no software to sell. Plan to the longer number.
This article is general business and legal information, not advice for your specific situation. How far due diligence needs to go, and what to do with what it finds, depends on the business and the deal. Speak with a lawyer about your own transaction before you commit to anything.
What the due diligence process is, in short
The due diligence process is the sequence of steps you work through to investigate a business before you buy it. You agree on a period, request documents, review them with your advisors, chase what does not arrive, and turn what you find into changes to the deal. The process ends when you close or walk away.
People use the phrase in two other senses as well, and our guide to due diligence separates all three. This page is about the sequence.
When to run due diligence when you are buying a business
Due diligence runs after you sign the letter of intent and before you sign the purchase agreement. That order is deliberate. The letter of intent buys you an exclusivity period, and the exclusivity period is what makes it safe to spend money investigating a business you do not own yet.
Running diligence earlier rarely works, because a seller will not open their financial records to someone who has not committed to anything. Running it later is worse, because by then you have signed the agreement that determines what you can do about anything you find.
The practical consequence is that the diligence period and the exclusivity period need to be the same length, and you agree both before you know what you are going to find. Our guide to the letter of intent covers how to set that period.
1. Agree on the diligence period before you sign the letter of intent
Decide how long you need, then make sure the letter of intent gives you that long. This is the only stage that happens before the clock starts, and getting it wrong is the mistake that costs the most, because a diligence period that expires early cannot be extended without the seller’s agreement.
Work backwards from the real timeline further down this page rather than forwards from the day you sign. Add time for the items that depend on third parties, because those are the ones you cannot speed up by working harder.
2. Send one numbered request list
Put every document you want into a single numbered list, grouped by category, and send it once with a date attached. A seller who receives one organised list can work through it. A seller who receives a new question every second day starts treating the buyer as a nuisance and slows down accordingly.
Number the items, because you and the seller and both sets of advisors will refer to them for the next two months. Say which items you need first, so your accountant can start on the financial review while the rest is still being gathered.
3. Review the financial records with your accountant
Hand the financial statements, tax filings and bank records to your accountant, and ask them to test whether the earnings are real and whether they repeat. This is the stage that most often changes the price, so it should start the day the first documents arrive rather than once everything has been collected.
BDC divides the work the way it usually divides in practice, noting that “an accountant can help you analyze the company’s financial records. Meanwhile, a lawyer can assist with the LOI, draft the purchase agreement and conduct legal due diligence.”
Ask for several years rather than one. A single strong year tells you nothing about whether the earnings repeat, and normalising owner compensation to a market salary often moves the figure the price was built on.
Reach back further on a share purchase, because the corporation’s tax history comes with it. CRA can normally reassess three years from the original notice of assessment for a Canadian-controlled private corporation and four years for other corporations, the business must retain its records for six years, and there is no time limit at all where a return involved misrepresentation. Buying assets mostly avoids this. Buying shares means the exposure transfers to you.
4. Run the legal and Ontario-specific searches
Your lawyer reviews the corporate records, the material contracts, the employment position and the litigation history, then runs a set of registry searches that show whether the assets are actually the seller’s to sell and whether anything is registered against them. This stage runs in parallel with the financial review rather than after it.
The usual set in Ontario is a PPSA search against the business assets, a Bank Act security search, litigation searches in the relevant courts, a search for writs of execution, a WSIB clearance certificate, the corporate minute book, and the landlord’s written consent to assign the lease. Bankruptcy and insolvency searches, corporate profile searches in other provinces where the business operates, and industry-specific lien searches get added depending on the deal.
The searches are quick to order and slow to come back, so starting them late is how a diligence period runs out with everything else finished.
For the full list of what to request in each category, our due diligence checklist for an Ontario acquisition sets it out in detail.
5. Chase what has not arrived
Keep a column for outstanding items and chase it weekly rather than at the end. What a seller does not produce tells you more than what they do, and a gap found in week two is a question you can still ask, while the same gap found in week eight is a delayed closing.
Read the non-answers as answers. “We don’t really have that written down” says something about how the business is run. So does a financial statement the owner prepared instead of the accountant, and so does a major customer relationship that turns out to have no written contract behind it.
Two weeks before the period expires, print the outstanding column on its own. That short list is the real risk list for the transaction.
6. Turn the findings into terms
A finding only matters if it changes the deal, so every item on the risk list has to become one of four things. It changes the price. It becomes a condition of closing. The seller fixes it before you close. Or a representation in the agreement, backed by an indemnity, covers it for long enough that you can still act if the problem surfaces later.
Turning findings into terms is the stage buyers skip, and skipping it wastes everything spent on the previous five. Discovering an unpaid remittance and then signing an agreement that says nothing about it means you have paid professionals to identify a problem and then bought the problem anyway.
How long the due diligence process takes
Allow six to 12 weeks. BDC puts due diligence for a business acquisition at “six to 12 weeks or longer, depending on the complexity of the company and transaction”, and that range matches what a straightforward owner-operated deal actually takes once third parties are involved.
You will find shorter timelines published online, and they tend to come from companies selling data rooms and deal-management software. A faster process is the product those timelines are advertising. A lender describing the same work has nothing to sell you and quotes roughly double.
The gap matters because the number you believe becomes the exclusivity period you negotiate. Plan to six weeks and you will be asking the seller for an extension at the point where you have the least goodwill and the most money already spent.
Most of the elapsed time is waiting rather than working. In our own practice acting on business purchases, landlord consent is the item most often still outstanding when a buyer wants to close. Landlords run on their own timelines and they have no particular interest in yours, so the practical consequence is a closing that gets delayed until the landlord is ready to act. No amount of diligence on your side speeds that up, which is exactly why the schedule needs slack in it.
The other reliable source of delay is the seller’s own paperwork. In practice there is a great deal of back and forth, because the seller has to go and find documents, sometimes cannot find them at all, and often sends through something unfinished or a disclosure that raises more questions than it answers. We run into this on nearly every transaction. It is the main argument for having someone experienced running the request list, tracking what has actually arrived, and pushing on the gaps, rather than treating diligence as a folder the seller fills in.
An illustrative example of the due diligence process
A buyer signs a letter of intent on a service business with a 75-day exclusivity period. The request list goes out in week one. Financial statements arrive in week two, and the accountant finds that the owner has been paying themselves below a market salary, so normalised earnings are lower than the price assumed.
In week four the lease arrives, and the landlord will not consent to an assignment without a personal guarantee from the buyer. In week six a PPSA search shows a registered security interest against equipment the seller described as owned outright. In week eight the largest customer confirms they have no written contract and are reviewing suppliers annually.
None of those four findings ends the deal. The price comes down to reflect the normalised earnings, the equipment lien becomes a closing condition requiring discharge, the personal guarantee gets negotiated down, and the customer concentration is covered by a holdback. The deal closes in week eleven, on different terms from the ones in the letter of intent.
That sequence is a normal due diligence process. Most diligence ends in a closing rather than a walk-away, on terms that have moved some distance from where the letter of intent started.
What the standard due diligence checklist covers
A standard checklist for a private acquisition covers eight categories: financial records, corporate records, commercial contracts, employees, assets and liens, real property, tax, and litigation and compliance. Each category requests a defined set of documents and tests one question about the business.
There is no single official version, and a checklist built for a public-company acquisition will run to hundreds of line items that an owner-operated business does not have. Our due diligence checklist for an Ontario acquisition sets out what to request in each category and the Ontario items that most templates leave off.
How to prove you did your due diligence
You prove due diligence with a contemporaneous record. Keep the request list, the dates each item was asked for and received, the advisor reports, and a written note of what you decided about each finding and why. The record is built as you go, because a file assembled afterwards is not evidence of the care you took at the time.
The principle is clearest in the health and safety context, where due diligence operates as a legal defence. The Canadian Centre for Occupational Health and Safety puts it plainly, noting that due diligence “is demonstrated by the actions taken before an event occurs, not after”.
The same logic applies to a transaction. If a dispute arises later about what you knew and when, the documented request list and the dated responses are what answer it. There is also a practical benefit that has nothing to do with disputes, which is that the record is the same tool that stops items being forgotten while the process is running.
What due diligence means in the workplace
In a workplace context, due diligence means taking every reasonable precaution to protect worker health and safety, and being able to show those precautions were in place before an incident. It is a legal standard rather than a transaction, and it is assessed on the systems, training and documentation an employer had beforehand.
The two senses share a logic and nothing else. Our guide to due diligence separates them properly if you have arrived here looking for the workplace meaning.
Another way of saying due diligence
Common alternatives are investigation, vetting, background checks, and simply doing your homework. In a transaction you will also hear the period itself called the diligence period, the inspection period, or the conditional period, depending on who drafted the agreement you are reading.
The wording matters less than what the period entitles you to do. What you should check is whether the agreement gives you a right to investigate, a right to receive the documents you need, and a right to walk away or renegotiate based on what you find.
Where this becomes a legal question
The process turns legal at the point where findings have to be written into the purchase agreement, because that is where an investigation becomes protection. The same finding can be worth a price reduction, a closing condition or an indemnity, and which one you get depends on how the agreement is drafted rather than on how thorough the diligence was.
The structure of the deal shapes this too. Our guide to asset purchase versus share purchase sets out how liability moves differently between the two, which changes what you need to investigate and what you need protecting from.
The underlying point is worth stating plainly. It is far better to find out a deal is bad early than to find out after you have spent tens of thousands of dollars on lawyers and other professional advisors.
Conclusion
The due diligence process runs in six stages, takes six to 12 weeks for a straightforward acquisition, and is mostly spent waiting on people who are not in a hurry. Agree a realistic period before you sign anything, send one organised request list, run the financial and legal reviews in parallel, chase what does not arrive, and make sure every finding ends up as a term in the agreement.
Although these are good starting points, every acquisition produces something the standard sequence did not anticipate, and how it should be handled depends on facts a general article cannot know about your deal. A good next step is to speak with someone who has worked through it before, whether an Accountant or a Business Lawyer. Our guide to buying an existing business sets out where diligence sits in the wider process.
If you are heading into a diligence period and want the timetable and the request list set up properly, schedule a complimentary discovery call with our firm, or reach the office at 416-580-0345.
