As a prospective buyer if you are trying to make a decision on whether or not to purchase an existing business, then performing the proper due diligence on a business is key to making sure that you have sufficient information to make the right decision. The term “due diligence” encompasses the various forms of informational searches conducted by the buyer, lawyers and other professional advisors. Information uncovered through due diligence can give the buyer a better picture of the assets and liabilities of the business that they are purchasing, including those not previously disclosed by the seller. Forewarned is forearmed as the saying goes. Armed with more detailed information about the business, the buyer is in a better position to decide whether or not it wishes to go through with the transaction, and is in a far stronger position to negotiate the various terms of purchase, including the purchase price.
We have prepared a list of due diligence searches that we commonly conduct for clients who are acquiring a business. This is by no means an exhaustive list, and the types of recommended due diligence searches can vary depending on the nature of the business and how the business has been set up. In addition, some types of due diligence searches will require that you obtain the written consent of the vendor in order to conduct the searches.
- Corporate Registry and records – If you are purchasing a business that is owned by a corporation, you will want to review their corporate records to confirm:
- That the company was validly incorporated;
- Who the directors and shareholders of the company are and that the parties you are negotiation with have the requisite authority to sell the business;
- That the company has the ability to validly transfer the business assets to you as the purchaser; and
- The company has not been dissolved or is at risk of dissolution.
- Employment Standards and WorkSafeBC – If the business has employees, you will want to conduct searches for:
- employment standards compliance records with Employment Standards Branch (“ESB”) to determine whether the company owes any unpaid wages, vacation pay, or termination pay; and
- workers compensation records (WorkSafeBC) to ensure that the company is registered with WorkSafeBC and that there are no outstanding assessments, penalties or orders against the company.
- Court searches – You may want to conduct court registry searches of the business and its owners to uncover any actual or pending litigation that the company or its owners is involved in. Court documents filed in the course of litigation are, in most cases, publicly accessible and can help the buyer assess the value and extent of any claims for and against the business or its owners.
- Tax compliance – You should also turn your mind to whether the company is current with its tax filings and whether there are any amounts owing to CRA. Some types of searches that may be conducted are:
- Source deductions searches to confirm that the company has been withholding or deducting portions of salaries, wages, and other remuneration paid to officers, directors, or employees;
- Corporate tax searches on the company to confirm that the company has been filing its income tax returns on time and that it has paid its assessed taxes;
- Excise tax compliance searches to confirm that the company has been collecting and remitting GST/HST and that no excise taxes are outstanding; and
- Provincial Sales Tax searches to confirm that the company has been collecting and remitting PST and that no PST is outstanding.
- Personal Property Securities Act registry – Searches of the company and its owners on the Personal Property Securities Act registry will help to uncover security interests, liens, and other encumbrances that may be registered against the personal property of the company, which provides information on the business’ liabilities.
- Land Titles Records searches. If the target business is the registered owner of land, you will want to conduct land title office searches to confirm:
- The registered owners of a particular parcel of land and the manner in which ownership is registered, if the property has multiple registered owners; and
- any notes, legal notations, encumbrances or other charges on title to the land which may restrict or benefit the owner of the land.
While you can expect that there will be some upfront cost to conducting due diligence searches, the information you collect may be invaluable. By conducting thorough due diligence searches of the business, you may uncover information and potential liabilities that can be used when negotiating the purchase price or terms of the purchase – or, more importantly, may assist you in avoiding unexpected liabilities that would otherwise not be revealed until after the transaction is completed.
For assistance with a business acquisition transaction or any other business law matter, please contact any member of our Business Law Group.
| Albert Chiu
Lawyer | Business Law
This article is intended to be an overview of the law and is for informational purposes only. Readers are cautioned that this article does not constitute legal or professional advice and should not be relied on as such. Rather, readers should obtain specific legal advice in relation to the issues they are facing.