How to Conduct Due Diligence
When a business is sold the process that normally occurs is that a conditional deal is negotiated with a few contingencies. One of the most important conditions is that the business for sale is subject to “due diligence” by the company buyer. The due diligence process entails the buyer to investigate facts and to determine that all representations are as stated and to essentially satisfy themselves that they are OK with proceeding with the transaction. It truly is the time for the buyer to check facts and do some ‘homework’ on the business.
During due diligence it is always recommended that buyers rely on their own professionals (lawyer, accountant and other professionals as needed).
The purpose of this article is to outline some more common activities that are on a due diligence checklist during a business for sale transaction. Please note that every deal is different – some require more thorough business investigation and some less.
Common items on a business due diligence checklist:
Financial Statements. The past 3-5 years of income statements and balance sheets. Accountant-prepared statements are preferred.
Tax Returns & Government Filings. Business income tax returns for the past 3-5 years to assist in validating the stated business financial results. Also, Ontario retail sales tax returns, GST returns, WSIB returns and other pertinent government filings should be reviewed as well as federal Canadian income tax returns too. Discuss with your accountant what is required.
Asset List. A complete list of assets included in the business sale. A proper summary should include the age, estimate fair market value and serial number for equipment and machinery.
Leased Equipment List. Similarly, there should be a list of equipment or other assets under lease that will be transferred or assumed by the buyer.
The Business Premises Lease. The buyer needs to review the premises lease and satisfy themselves with the terms and that the lease is assumable. All leases and contracts should be reviewed by the buyer’s lawyer.
Employee Information. If it is not feasible to identify the employees by name then certainly by job title with information regarding job descriptions, compensation including benefits and bonuses, tenure of employment, any employment agreements or contract labour. Employee issue should be reviewed by a lawyer in order understand how best to handle employees during the transition as well as any surviving liabilities to the new owner.
Contracts. A copy of contracts with existing business customers or vendors.
Permits. A list of permits or licenses required to operate the company.
Operating Documentation. If the business has a process or operating procedures that are critical to its success, these should be reviewed during due diligence.
Lawsuits. If there are any pending or existing lawsuits that the business for sale is involved with, these must be reviewed with your lawyer.
List of Top Customers. This must be identified in order to determine that the business is not reliant on a few customers for a large percentage of its revenue. If not identified by name then these customers can be identified by a description and sales volume.
Copy of Marketing Materials. Samples of flyers, ads, newspaper inserts, etc. A buyer should have a fair degree of understanding about the company’s marketing activities.
As always take the advice of a business broker so you don’t miss out on anything that could cost you later but please rely on the guidance of your professional advisers – your lawyer & accountant to assist you through the due diligence process.
