Anyone who has ever bought or sold a business — or has even thought about it — has likely heard the term “due diligence.” Most people, however, don’t fully understand it or tend to underestimate its value. Due diligence is defined as “reasonable steps taken in order to satisfy a legal requirement, especially in buying or selling something.”
To make things easier, due diligence can simply be described as the business equivalent of a home inspection. It involves thoroughly checking over all aspects of a business prior to purchase or a sale. Is the foundation strong (legal documentation)? Will the roof need to be replaced in a year (financial issues)? Does the vendor have clear title (debt checks)? Properly executed due diligence can save you from all sorts of issues, stress, and costs, whether up front or down the road.
Legal vs. financial due diligence
To further break it down, due diligence is often separated into two processes: legal due diligence and financial due diligence. Legal due diligence may involve a high-level review of key legal documents or any legal obstacles that may be impeding the sale of the business. Financial due diligence involves verifying all financial claims made by the seller.
The following checklist is a good starting point to determine the scope of your due diligence, but it should not be considered complete — always consult a professional ensure you have all your bases covered.
- Corporate structure, articles, bylaws, minute books, and capitalization
- Corporate, asset, and debt searches
- Financial statements
- Government obligations (PST, GST, payroll deductions, WCB, etc.)
- Operational considerations, i.e. documentation of policies and procedures
- Real property review
- Material contracts
- Employment issues
- Litigation (past, present, potential)
- Environmental issues
- Related party transactions
- Intellectual property (patents, trademarks, other)
- Licenses (liquor, food, etc.)
What to expect
Due diligence typically lasts two to four weeks, though it can vary wildly depending on the complexity of the transaction. During this time, both the buyer and seller will often enter into a confidentiality agreement, protecting the seller’s best interests.
Once documentation is provided, it is best to have a professional — a broker, consultant, or lawyer — review all the materials involved to help spot potential deal breakers. If everything appears to be in order, then the transaction can move ahead, but if certain reports or documents aren’t adding up, you’ll be notified, and you’ll be able to explore that aspect of the business to determine whether or not to move forward with the deal.
We can help!
Beal Business Brokers & Advisors has experience with all types of business transactions, and our consultants can help you through the due diligence process. We offer expert advice on key elements of the purchase agreement, including price, terms, and conditions — all with the goal of successful and mutually beneficial close.