Legal Due Diligence You Need To Consider When Buying A Business

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Before taking the leap into business ownership, prospective buyers must do their due diligence. The process of purchasing a business, whether through acquiring shares or assets, requires thorough examination and research to ensure the investment aligns with expectations. This critical investigation, known as due diligence, serves to verify the accuracy of information provided by the seller while uncovering any potential issues. 

Given the complexity of business transactions, it’s advisable to consult with a qualified lawyer who can guide you through the legal intricacies and help safeguard your interests throughout the due diligence process.

Asset Purchase vs Share Purchase Due Diligence

Before deciding on the purchase, some preliminary due diligence is essential. This helps determine the company’s value, decide whether to buy assets or shares, and what further investigations are needed. Before making any decisions be sure to collect the necessary documents during this process and consult with experienced legal counsel before signing anything.

Businesses can be acquired in two main ways: via asset purchase or share purchase. In an asset purchase, the buyer picks specific assets, while the seller keeps most liabilities. In a share purchase, the buyer acquires all the company’s shares, including all assets and liabilities. The choice between these methods depends on tax, valuation, and legal factors.

Due diligence varies based on the type of transaction. For an asset purchase, the buyer must identify any liabilities they don’t want to take on. For a share purchase, the buyer must be aware of all the company’s obligations. The extent of due diligence depends on the business type, transaction value, transaction type, and the buyer’s familiarity with the company. Your lawyer will walk you through what is needed, and why as you go through the process so don’t fret.

What Documents Will You Need For Due Diligence When Buying A Business?

Past Business Documents. Documents describing past histories, present and past annual reports, financial statements, corporate organizational charts, and officer and director’s manuals. Reviewing the website or new releases should also be included.

Copies or Access to Financial Records. These include:

  • Annual financial statements, audited or unaudited, monthly management statements or quarterly statements for past years, and future projections;
  • List of accounts receivable aged by 30, 60, 90 and over 90 days, including information on all bad debts;
  • Tax information and copies of returns, assessments, etc.;
  • Information about prepaid expenses and contingent liabilities for things like intercorporate or shareholder guarantees;
  • Information regarding outstanding obligations such as shareholder loans, trust indentures, and banking operations; and
  • Customer lists, customer supply agreements, advertising, and public relations documentation.

List Of All Tangible Assets. This list describes all tangible assets owned by the company and their estimated value. This should include:

  • List of inventories, including supply agreements and production agreements;
  • List of equipment complete with all operating manuals, manufacturer’s warranties, service agreements; and
  • Real property documentation including all deeds, mortgages, surveys, and tax assessment numbers.

List Of All Intangible Assets. This describes all intangible assets owned by the company and their estimated value, including:

  • Information about any knowledge borrowed or obtained from third parties and any royalties paid; and
  • All intellectual property such as patents, trademarks, industrial property of all kinds, including particulars of all registered documents to prove ownership and user arrangements; and
  • List of key employees who possess this knowledge and operation processes.

Property Records. This should include all leases and realty:

  • Copies of property leases and contact information for the landlord;
  • Copies of equipment and motor vehicles, leases, and their contact information;
  • All utility arrangement agreements including electricity, water; and heat, and
  • Environmental records for any property.

Employee Records. You should obtain:

  • List of all employees by departments and details of salaries, commissions, bonuses or other remuneration, length of service, and fringe benefits;
  • Copies of employment agreements;
  • Copies of any consulting agreements;
  • Information about employee benefit plans, pension plans, drug and health care insurance; and
  • All occupational health and safety records.

Supply and Service Agreements for any outsourced or contracted maintenance. This could include human resources, IT, landscaping, waste removal, freight for materials and goods, etc.

Licensing and Permits including all necessary licenses to operate the business, like elevator licenses, GST and PST numbers, and all government filings.

Insurance. Obtain copies of all insurance policies and premiums.

Litigation. If there are any outstanding or pending claims or actions against the company, it’s important to have all the documentation.

Corporate Minute Book. Access to the company’s minute book and any other corporate records to verify that the corporation being acquired has been properly incorporated. The corporate minute book will also contain details about who owns the company. 

Thorough Due Diligence Is Necessary When Buying A Business As Is Working With An Experienced Lawyer

This checklist provides an initial overview of key considerations when acquiring a company. However, the extent of due diligence required may vary depending on the specific transaction. It’s crucial to engage experienced legal counsel before signing any documents when buying a business or franchise. Your lawyer not only helps you determine the appropriate scope of due diligence but ensures a smooth acquisition process as well.

For expert guidance when investing in a new or existing business, reach out to Hukam Law. Our team possesses the experience and expertise necessary to cover all the due diligence so that you avoid legal issues while protecting your hard-earned dollars. Contact us at 705-915-0884 or via email at info@hukamlaw.ca to discuss how we can assist with your business acquisition.

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***The information provided in this blog is for general informational purposes only and should not be construed as legal advice. If you have legal questions, we strongly advise you to contact us.