Question:
What is due diligence when you are interested in buying a business?
Facts:
Due diligence is the process of reviewing the vendor’s financial information, records and contracts. Purchasers will usually hire professional advisors such as an accountant and lawyer to help them with this process. An accountant can help with analyzing the financial information and adding value through tax planning. A lawyer can review contracts and leases and advise on any commercial and liability issues.
The period for due diligence can be a few weeks to a few months and will be defined in the Letter of Intent.
The extent of the due diligence will be dependent on whether it is an asset sale or a share sale. A share sale will require more due diligence as a purchaser has more liability for relationships with stakeholders, reputation, employees and tax reporting.
Financial reporting
The internal and external financial statements should be reviewed for quality and validity. The accountant will match these up with the corporate tax return filed and review tax balances. On a share sale, it is important to check if the vendor is current in filings and if any outstanding tax balances are due for payroll, GST, and corporate tax. You would also want to check if there are any pending audits from CRA.
Assets
Physical assets should be reviewed for their current condition, expected useful life, and actual title.
Contracts and Leases
Any contracts between sellers and vendors and customers should be reviewed. All lease agreements such as equipment, rental of premises, and vehicle leases should be checked.
Employees
It is common during due diligence for buyers to meet key employees within the organization so that they can be retained after the purchase. This could involve negotiations for new contracts with the employees.
Legal
The lawyer will review any outstanding lawsuits filed against the seller. The minute book will be checked if it is up to date and for any shareholder agreements. They will also review lease agreements and contracts and identify any issues.
After due diligence has been completed, the buyer will revisit the offer and terms and they may decide to reduce the offer price if they discover any issues or concerns.
If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.
Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.
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