There are a number of issues a prospective purchaser must consider before buying a business. Before purchasing any shares or assets, it is important to examine and research the business to ensure you are getting what you bargained for. This examination process is commonly referred to as due diligence and is undertaken to ensure all the facts presented by a seller are correct.
Typically, there are two manners by which a business can be acquired; an Asset Purchase and 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. In an Asset Purchase, it will be necessary 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. In a Share Purchase, the purchaser needs to be fully informed of all liabilities, burdens, and problems of the business, since upon 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.
In either an asset or a share purchase, the following 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. Below you will find a list of documents you should collect when conducting your preliminary due diligence. You should not sign any documents prior to retaining counsel. Experienced counsel, such as Pawlina Law, will work with you to help determine the appropriate amount of due diligence that should be conducted.
1. Documents which Describe the Business
First and foremost, you will need to understand what type of business you are buying and be informed of the history and finances of the company. It is important to obtain documents describing past histories, present and past annual reports, financial statements, corporate organizational charts, and officer and director’s manuals. Reviewing and retaining any public documents such as a website or new releases will also be helpful.
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 intercorporate 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 deeds, mortgages, surveys, tax assessment numbers.
4. Documents listing all Intangible property
Obtain a list describing all intangible assets owned by the Company and any valuations regarding any of the same. This includes:
- information concerning any know-how borrowed or obtained from third parties and any royalties paid; and
- 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; and
- all occupational health and safety records.
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.
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.
Obtain any information concerning all outstanding or pending claims or actions against the company.
11. Corporate Minute Book
You will also need to have access to the company’s minute book and any other corporate records. 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.
The above list is a preliminary checklist of matters to examine when acquiring a company. Depending on the transaction, more Due Diligence may be required. Do not sign any document, even a Non-Disclosure Agreement, without first retaining counsel. Experienced counsel, such as Pawlina Law, 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.