Instead of launching a new business from scratch, many entrepreneurs prefer buying one already in existence. Whether it be purchasing a corporation’s shares or buying the bulk of its assets, it is essential that such an important investment be preceded by a thorough review of the target business. In other words, just as you wouldn’t buy a used car without looking under the hood first, you shouldn’t buy a business without carrying out proper due diligence.

The idea is to gather as much information as possible on the target business’ operations and finances to allow the purchaser to make an informed decision on whether it would be wise to follow through with the purchase.

You will find below some of the items that should be reviewed in most due diligence processes.

Organization

Articles of incorporation, by-laws and ledgers

Minute book (directors and shareholders’ resolutions)

Shareholders agreement

Financial information

Financial statements (at least the latest 3 to 5 years)

Financial statements for the year-in-progress

Budgets

Various financial reports (cash, accounts, debts, line of credit, etc.)

Books and records

Tangible assets

Inventory

Real estate

Leases

Land titles, insurance, mortgages, permits, etc.

Intellectual property

List of trademarks, commercial names, patents, copyrights, etc.

Knowhow, commercial secrets

Consultation contracts, IP licenses or transfer agreements

Employees

List of employees, salaries (current and for the last 3 years), bonus paid during the last 3 years and seniority breakdown

Non-competition, non-solicitation and confidentiality agreements

Summary of benefits and pensions plans

Collective bargaining agreement

Stock option plans

License et permits

Copies of all permits, licenses or consents issued by a competent authority

Correspondences and/or important documents issued by a competent authority

Environment

Environmental review reports

List of all hazardous substances used by the business in its operations

Copies of all environmental permits, licenses, consents, correspondences and/or documents from a competent authority

Tax

Income statements for the last 3-5 years

Notice of assessment and other tax-related documents for the last 3-5 years

Important contracts

Contract with directors, officers or shareholders

Employment contracts

Financial contracts (bank loans, financing, line of credit, mortgages, etc.)

Guarantees offered by the business

Contracts dealing with current and/or outstanding terms of payments

Commercial contracts (distribution, representation, marketing, suppliers, etc.)

Miscellaneous

Information regarding products and services

Information regarding customers

Legal proceedings (threatened or instituted)

Insurance

Conclusion

As you can see from the list above, looking under the hood may reveal certain issues, these issues may result in 1) a request to rectify a discrepancy; 2) a reduction of the price initially offered or 3) the outright withdrawal of the offer to purchase. As such, this due diligence process should not be overlooked.

Any questions or ideas for our next article? Please contact us at the 514-856-5601 (320) or at malek@maleklaflamme.ca.

Business for sale: look under the hood first!

List of items that should be reviewed before buying a business.

Sam Tardif Malek

Malek Laflamme l.l.p.