Having a knowledgeable business lawyer on your side is crucial to the success of any business purchase or sale. It is critical to make sure you are getting the agreed-upon services by conducting a thorough audit and investigation of the business. This is sometimes referred to as “due diligence” and is performed to establish that the vendor has supplied proper information.
There should also be a documented buy-and-sell agreement outlining the expectations and responsibilities of both parties, as well as the specifics of the agreement, such as any non-compete clauses.
When selling or purchasing a business, there are several aspects to consider, including whether to structure the agreement as an asset purchase or a share purchase. In an Asset Purchase, the buyer receives just certain assets, while the majority, if not all, of the seller’s obligations remain. In a Share Purchase, on the other hand, the purchaser acquires all of the company’s shares, essentially transferring all of the business’s assets and obligations to the purchaser. Frequently, tax and legal considerations determine whether a corporation is bought through an Asset Purchase or a Share Purchase.
The sort of Due Diligence needed depends on a number of variables, including the nature of the deal.
In a Share Purchase, the purchaser must be fully aware of the responsibilities, burdens, and issues of the business, since it will assume these duties upon acquiring the shares. In the end, the amount of Due Diligence that must be performed will rely on:
- the sort of business being purchased;
- the worth of the deal,
- the kind of transaction that is occuring; and
- the degree to which the Purchaser is acquainted with the business being bought.
In an Asset acquisition, you must evaluate whether there are any responsibilities that the buyer does not desire to bear, so that they may be recorded as excluded assets.
Due Diligence Checklist Before Purchasing a Business
For asset or share purchases, due diligence must be done. This due diligence will assist you in determining how much you should pay for the business, and if you should acquire the business’s assets or shares, and what additional inquiries and searches are necessary. Here is a handy list of the documents that should be gathered during preliminary due diligence. You should not sign any papers before hiring legal representation.
1. Access to or Copies of Financial Records
Obtain access to or copies of all financial records, including: audited or unaudited yearly financial statements and management statements generated on a monthly or weekly basis for prior years and future estimates. listing of accounts receivable aged 30, 60, 90, and above 90 days, as well as information on all delinquent accounts; tax information and copies of tax returns, assessments, etc.; information pertaining to pre-paid costs and contingent liabilities for items such as inter-corporate or shareholder guarantees. Information on any outstanding commitments, such as shareholder loans, trust deeds, and banking transactions; and client lists, customer supply contracts, marketing and public relations.
2. Corporate Documents
It is essential to get the corporate documents or confirm that yours is appropriately constructed.This will help you to confirm that the purchased business was lawfully incorporated. Any flaws should be identified and addressed immediately.
3. Documents Enumerating all Tangible Asset
Obtain a list of all physical assets possessed by the business, along with any values of such items. Additionally, you should obtain: lists of inventories, which include supply and manufacturing agreements; specifications of every hardware, including user guides, guarantees, and service contracts; and documentation pertaining to real property, including all lease information, deeds, mortgages, surveys, and tax assessment numbers.
4. Documents Enumerating all Intangible Assets
Gather an inventory of the business’s physical assets along with an estimate of their worth. This consists of: contact information, social media handles, phone numbers, and other details related to goodwill; all intellectual property, including patents, trademarks, and industrial property of all types, as well as specifics of all papers registered to verify ownership and registered user agreements; and particulars on the essential personnel who are in possession of such expertise and running procedures.
5. Employee Documents
Collect any employment documents, including: a complete and full list of all staff members, broken down by divisions such as management, sales, and labour, with information on each person’s job title, salary, commissions, bonuses, duration of service, and benefits; and copy of employment contracts; copy of any consulting agreements with independent contractors or agents; copies of all health, medication, and retirement plans; all workplace safety and health documents.
6. Property Documents
Obtain lists of all leased products and property, including: agreements to rent property, complete with lease paperwork and a landlord point of contact; copies of all vehicle and equipment leases, as well as the contact information for the relevant lessors, so that assignments may be established; Copies of the City’s waste sampling gateways and any agreements with utilities such as Hydro; and environmental documentation for all properties.
To assess the adequacy and cost of coverage, get copies of any business-related insurance policies and premiums.
Collect copies of any contracts pertaining to items and services provided, including but not limited to those involving human resources, outsourcing, information technology, landscaping, garbage collection, freight, etc.
9. Authorizations and Permits
Obtain copies of any required business licenses, including elevator licenses, GST and PST numbers, and other government filings.
Obtain any information on current or existing claims or proceedings against the business.The purpose of this document is to serve as a quick guide for things to look into before committing to a business purchase. Depending on the kind of transaction, further Due Diligence may be needed. We recommend against signing any agreement, including a Non-Disclosure Agreement, without first consulting with legal counsel.
The Sodagar & Company Law Corporation can assist you. Contact us here and our team of expert attorneys can assist you in determining the right level of due diligence to be undertaken and can ensure that your purchase or sale proceeds without a hitch.