Are you looking to buy or sell an existing business? Nuraney Law Group can help! Having an experienced business lawyer on your side will help ensure your transaction goes smoothly.
It is important to examine and research the business to ensure you are getting what you have agreed upon. This examination process is commonly referred to as due diligence and is undertaken to ensure all the facts presented by a seller are correct.
You should also have a buy-and-sell agreement, signed by both parties, that spells out the demands and obligations of each, as well as the terms of the agreement, including non-competition provisions.
There are a lot of factors to consider when selling or buying a business including deciding whether to structure the deal as an asset purchase or a share purchase. In an Asset Purchase, the buyer only acquires selected assets and most, if not all, of the liabilities, remain with the seller. Conversely, in a Share Purchase, the buyer purchases all the shares of a company, effectively transferring all the company’s assets and liabilities to the purchaser. Tax and legal implications will often dictate whether a business is acquired through an Asset Purchase or a Share Purchase.
The type of Due Diligence required is dependent on a variety of factors including the type of transaction.
Asset Purchase
In an Asset purchase, you will need to determine if there are any liabilities or burdens which the purchaser does not wish to assume so the same may be properly recorded as excluded assets.
Share Purchase
In a Share Purchase, the purchaser needs to be fully informed of all liabilities, burdens, and problems of the business, since on becoming the owner of the shares, it will be assuming these obligations. Ultimately, the amount of Due Diligence that should be conducted will be dependent on:
- the type of business being acquired;
- the value of the transaction,
- the type of transaction occurring (Share Purchase or Asset Purchase); and
- the level of familiarity of the Purchaser with the company being acquired.
Due Diligence Checklist When Buying a Business
In either an asset or a share purchase, preliminary due diligence should be conducted. Conducting this due diligence will help you determine what you should pay for the company, whether you should purchase assets or shares of the company, and what additional investigations and searches should be conducted.
Here is a convenient list of documents that should be collected when conducting your preliminary due diligence. You should not sign any documents prior to retaining counsel. Experienced counsel, such as Nuraney Law, will work with you to help determine the appropriate amount of due diligence that should be conducted.
1. Corporate Documents (ie: Minute Book)
First and foremost, it is important to obtain the corporate minute book, or ensure that yours is properly created (we can help with that!). This will allow you to verify that the corporation being acquired has been properly incorporated. The corporate minute book will also detail who owns the company. Any deficiencies should be noted and corrected as soon as possible. For information on how to fix a corporate minute book can be found in our resources page.
2. Copies or Access to Financial Records
Obtain copies or access to all financial records, these include:
- audited or unaudited annual financial statements and management statements prepared monthly or quarterly statements for past years and projections for the future;
- listing of accounts receivable aged by 30, 60, 90 and over 90 days, including information on all bad debts;
- information regarding taxes and copies of returns, assessments, etc.;
- information regarding pre-paid expenses and contingent liabilities for such matters as inter-corporate or shareholder guarantees;
- information regarding any outstanding obligations such as shareholder loans, trust indentures and banking operations; and
- customer lists, customer supply agreements, advertising and public relations.
3. Documents listing all Tangible Assets
Obtain a list describing all tangible assets owned by the Company and any valuations regarding any of the same. Moreover, you should obtain:
- Lists of inventories, including supply agreements and production agreements;
- A list of equipment complete with all operating manuals, manufacturer’s warranties, service agreements; and
- Real property documentation including all lease information, deeds, mortgages, surveys, tax assessment numbers.
4. Documents listing all Intangible property
Obtain a list describing all tangible assets owned by the Company and any valuations regarding any of the same. This includes:
- information concerning goodwill, website information, social media access, phone numbers;
- all intellectual property such as patents, trade-marks, industrial property of all kinds, including particulars of all documents registered to prove ownership and registered user arrangements; and
- information concerning key employees who are possessed of such know-how and operation processes.
5. Property Records
Lists of all leased goods and realty should be obtained including:
- leases of real property including copies of all such leases and contact party for the landlord;
- copies of all leases of equipment and motor vehicles together with telephone numbers and contact parties of such lessors so that assignments may be arranged;
- copies of all utility’s arrangements such as agreements with Hydro, waste sampling portals for the City; and
- environmental records for any property.
6. Employees Records
Obtain all employment records including:
- detailed list of all employees by departments such as management, sales and labor and details of salaries, commissions, bonuses or other remuneration, length of service, and fringe benefits;
- copies of any employment agreements;
- copies of any consulting agreements with agents or independent;
- copies of all employee benefit plans, pension plans, drug and health care insurance;
- all occupational health and safety records.
7. Services
Obtain copies of all supply and service agreements such as human resources, outsourcing, IT, landscaping, waste removal, freight for materials and goods, etc.
8. Licensing and Permits
Obtain copies of all necessary licenses to operate the business, including elevator licenses, GST and PST numbers and all other government filings.
9. Insurance
Obtain copies of all insurance policies necessary for the operation of the business and copies of premiums to determine the adequacy and expense of coverage.
10. Litigation
Obtain any information concerning all outstanding or pending claims or actions against the company.
This is meant to be a preliminary checklist of matters to examine when acquiring a company. Depending on the transaction, more Due Diligence may be required. We strongly suggest avoiding signing any document, even a Non-Disclosure Agreement, without first retaining counsel.
The Nuraney Law Group can help. Contact us and our team of experienced lawyers, will work with you to help determine the appropriate amount of due diligence that should be conducted and can help make sure your acquisition or sale goes smoothly.