When you sell your business, due diligence is the buyer’s deep inspection — weeks of their lawyers and accountants going through your corporate records, contracts, finances, and liabilities, looking for reasons to lower the price or walk away. You can’t avoid it, but you can prepare for it. What they find — or can’t find — often decides whether you close at the agreed price or watch it get chipped down.
The deal doesn’t get real at the handshake or the letter of intent. It gets real during due diligence, when the buyer stops taking your word for things and starts checking. A seller who’s ready for that sails through. A seller who isn’t spends the process explaining problems from the back foot.
What due diligence actually is
After the letter of intent, the buyer investigates everything about the business to confirm it’s what you said it was. It isn’t personal — it’s risk-hunting. Every question is really “what could go wrong here after I own it, and should the price reflect that?” The cleaner your house, the fewer reasons they find to reopen the number.
What they dig into
- Corporate records. The minute book, share register, and filings — up to date and consistent. A disorganized minute book is the classic diligence delay, and it can’t be reconstructed overnight.
- Material contracts. Your key customer and supplier agreements — and crucially, whether they survive a change of control or terminate when you sell. A key contract that dies on closing can gut the value of the deal.
- Intellectual property. Does the company actually own its IP, with proper assignments from founders and contractors, and are the trademarks registered? Buyers pay for what you can prove you own.
- Employment. Employment agreements, correct contractor-versus-employee classification, outstanding entitlements, and how dependent the business is on a few key people.
- Financials and tax. Statements that hold up, tax filings in order, and clear, defensible normalizations — no surprises that make a buyer distrust the rest of the numbers.
- Litigation and liabilities. Active or threatened claims, contingent liabilities, and any personal guarantees or off-balance-sheet obligations.
- Licences and real estate. Regulatory approvals and permits, and whether your lease or property can be assigned to the buyer.
How problems turn into lost money
Here’s the part sellers underestimate: diligence findings rarely blow up a deal outright. They do something quieter and more expensive — they become a price reduction, a bigger holdback or escrow, a specific indemnity you have to give, or a condition you must fix before closing. Every unresolved item is a piece of leverage handed to the buyer, at the exact moment you have the least. Ten small problems don’t cancel the deal; they reprice it.
How to be ready
Assemble a diligence-ready package — a data room — before you go to market, and fix the fixable issues early: get key contracts assignable, IP properly assigned, the minute book current, contractors correctly classified. This is the same pre-sale housekeeping that raises your multiple, done for the same reason: every clean item is one less reason for the buyer to chip the price. A seller who hands over an organized, complete package signals a well-run business — and closes faster, at a better number, than one who makes the buyer go digging.
If a sale is on your horizon, the smart time to run your own diligence — and fix what it turns up — is before the buyer runs theirs.
KS
Koby is a business lawyer and the principal of Smutylo Law+ in Ottawa. Called to the Bar of Ontario in 2001, he has over two decades of experience in corporate, commercial, securities, and technology law, acting for business owners across Canada and for U.S. companies operating in Canada. He is also a trained mediator. More about Koby →