Key takeaways
- Due diligence has one purpose, to confirm that what you were told is true and to find what you were not told.
- Financial diligence is about cash, not profit, so tie the statements to the bank and the tax filings.
- Legal, tax and employment items belong with your lawyer and CPA, and this checklist tells you what to ask them to cover.
- Everything you find goes into one of three places: the price, the agreement, or the decision to walk away.
Once a seller accepts your letter of intent, you enter due diligence. You will usually have exclusivity for a defined period, access to a data room, and the right to ask for anything reasonable. The work is to confirm that the business is what the confidential information memorandum said it was, and to find the things that were not said.
This checklist is the one we work through with buyers in British Columbia. It is organised by area, and each area names the professional who should lead it. We coordinate the process and interpret the results, and your lawyer and CPA do the legal, tax and accounting work. Do not skip the professionals to save fees. Their findings are what you negotiate with.
Financial diligence
Start with cash, because profit can be shaped and cash cannot. Request bank statements for the period covered by the financial statements and tie deposits to reported revenue. Request the sales tax and payroll filings and reconcile them to the statements. Request the corporate tax returns and compare them to the financial statements, asking about any differences.
Then test the earnings. Walk through every normalisation adjustment with the seller's documentation. Review the accounts receivable aging for old balances and the accounts payable for anything overdue. Review inventory for obsolescence. Review capital spending over several years so you know the real replacement cost of running the business. Ask for monthly results for the current year so you can see whether performance is holding during the sale.
- Bank statements tied to revenue and expenses
- Sales tax, payroll and corporate tax filings reconciled to statements
- Add-back schedule with supporting documents for each line
- Receivables aging, payables aging, inventory count
- Capital spending history and equipment condition
- Current year monthly results against the prior year
Legal and contractual diligence
Your lawyer leads here. Corporate records should show who owns the shares and that the company is in good standing. Every material contract should be reviewed for assignment rights, change of control clauses, term and termination. The lease deserves special attention, including the landlord's consent requirements and what personal guarantees the landlord will demand from you.
Ask about litigation, past and threatened. Ask about regulatory matters, licences and permits, and whether they transfer or must be reissued. Ask about intellectual property, from the business name and domain to any software, designs or recipes, and confirm the company actually owns it. Ask whether any assets are leased or encumbered, and arrange for searches of the relevant registries.
People and operations
Review the employee list with start dates, roles, pay and any written agreements. Your lawyer will advise on obligations that transfer and on what happens if you do not hire everyone. Identify the people who matter most and plan how and when you will meet them. Ask whether any employee is also a key customer relationship or a key supplier relationship.
On operations, visit the business in working hours more than once. Watch how orders come in, how work is scheduled, how quality is checked and how customers are handled. Ask to see the systems: accounting, scheduling, point of sale, customer records. Check that the data in those systems supports what the CIM said about customers and volumes.
Tax and structure
Your CPA leads here. In a share sale you inherit the company's tax history, so the review covers past filings, assessments, outstanding disputes and the risk of reassessment. In an asset sale the focus moves to how the price is allocated among assets and what sales taxes apply to the transfer. Payroll remittances and workers' compensation accounts should be current and clearance confirmed where it is available.
This is also the stage to finalise your own structure: whether you buy personally or through a corporation, how the purchase is financed and how the lender's security interacts with the seller's holdback or vendor financing. These decisions are legal and tax matters, and they should be made with your advisers before the agreement is drafted.
Turning findings into decisions
Every finding goes into one of three places. Some adjust the price, for example a piece of equipment that needs replacing sooner than described. Some go into the agreement as a representation, an indemnity, a holdback or a condition, for example a pending dispute whose outcome is unknown. Some end the deal, for example revenue that cannot be tied to the bank.
Keep a running log of findings with the proposed treatment of each, and share it with the seller's adviser as you go rather than all at once at the end. Surprises at the end feel like renegotiation and sour the relationship you will need for the transition. If you want help running diligence on a BC acquisition, call or text (604) 632-4959.