How to Conduct Due Diligence

When a business is sold the time of action that typically occurs is that a conditional deal is negotiated with a few contingencies. One of the most important conditions is that the business for sale is unprotected to due diligence by the company buyer. The due diligence course of action entails the buyer to probe facts and to determine that all representations are as stated and to essentially satisfy themselves that they are OK with proceeding with the transaction. It truly is the time for the buyer to check facts and do some homework on the business.

During due diligence it is always recommended that buyers rely on their own professionals (lawyer, accountant and other professionals as needed).

The purpose of this article is to outline some more shared activities that are on a due diligence checklist during a business for sale transaction. Please observe that every deal is different – some require more thorough business investigation and some less.

shared items on a business due diligence checklist:

Financial Statements. The past 3-5 years of income statements and balance sheets. Accountant-prepared statements are preferred.

Tax Returns & Government Filings. Business income tax returns for the past 3-5 years to assist in validating the stated business financial results. Also, Ontario retail sales tax returns, GST returns, WSIB returns and other pertinent government filings should be reviewed in addition as federal Canadian income tax returns too. Discuss with your accountant what is required.

Asset List. A complete list of assets included in the business sale. A proper summary should include the age, calculate fair market value and serial number for equipment and machinery.

Leased Equipment List. Similarly, there should be a list of equipment or other assets under lease that will be transferred or assumed by the buyer.

The Business Premises Lease. The buyer needs to review the premises lease and satisfy themselves with the terms and that the lease is assumable. All leases and contracts should be reviewed by the buyers lawyer.

Employee Information. If it is not possible to clarify the employees by name then certainly by job title with information regarding job descriptions, compensation including benefits and bonuses, tenure of employment, any employment agreements or contract labour. Employee issue should be reviewed by a lawyer in order understand how best to manager employees during the change in addition as any surviving limitations to the new owner.

Contracts. A copy of contracts with existing business customers or vendors.

Permits. A list of permits or licenses required to function the company.

Operating Documentation. If the business has a course of action or operating procedures that are basic to its success, these should be reviewed during due diligence.

Lawsuits. If there are any pending or existing lawsuits that the business for sale is involved with, these must be reviewed with your lawyer.

List of Top Customers. This must be identified in order to determine that the business is not reliant on a few customers for a large percentage of its revenue. If not identified by name then these customers can be identified by a description and sales quantity.

Copy of Marketing Materials. Samples of flyers, ads, newspaper inserts, etc. A buyer should have a fair degree of understanding about the companys marketing activities.

As always take the advice of a business broker so you dont miss out on anything that could cost you later but please rely on the guidance of your specialized advisers – your lawyer & accountant to assist you by the due diligence course of action.

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