Protecting Yourself When Purchasing A Business

Due Diligence Work!

Businesses in Canada can be very successful. Buying a business can be an intimidating and extremely complicated process. Due diligence when buying businesses is how you protect yourself.  It is important that you perform extensive research on the business you want to buy. Due diligence when buying businesses helps you make an educated decision about the type of business you want to purchase and the fair price to pay for that business. This page only lists out some of the basics. There is a wide range of due diligence when buying businesses In Alberta depending on the particular business. If you need guidance for the best due diligence for a business purchase, call the corporate commercial lawyers at Kahane Law Office.

Determine The Right Business for You

If you are thinking of buying a business, you can either buy an existing independent business or a franchise. There are pros and cons to both, so ensure you choose to buy the business that will work for you.

Franchise

Due diligence when buying businesses is both similar and different when buying a franchise. Much of the suggestions below are also true for a franchise. That said, there are often more steps in the due diligence. For more information about buying a franchise, see “Due Diligence when Buying a Franchise”.

Independent Business

If you buy an independent business, you either buy the assets of the business or the shares of the business. It is important that you understand the pros and cons associated with either purchase. You must consider various aspects of the business to determine which purchase works best for you. These include liability, company name or trade mark, and goodwill. Talk to both your accountant and your lawyer before you commit to the purchase.

Where To Start With Due Diligence When Buying Businesses?

Regardless of the type of business or purchase transaction, you will need to do your due diligence on that business. Some general key considerations that need to be looked at before you purchase a business:

Company Financials

You need to look over the financials for the business you are buying with great detail. This will include checking the state of the receivables, payment history, state of assets, legal status and inventory. If the business already has money in the bank, make sure you confirm whether that money will remain in the account when you purchase the business. You need to ensure you are well aware of all the financial obligations the business has, such as outstanding debt. It is important that you are aware of all encumbrances and that you confirm all corporate taxes are paid before you purchase the business. Understanding the financial assets and liabilities will help you determine the fair market value for the business.

Financial related due diligence when buying businesses does not always mean that the company is in exceptional financial shape. There are people who invest in companies that are doing terribly. They recognize that there is room to improve things and often get the business for a really low price. They key to the financial due diligence is making sure that you know the nature of what you are purchasing.

Understand How To Continue Running The Business

It is important to understand how this business will continue moving forward. If there are existing contracts with suppliers or customers, you need to ensure you properly understand your obligations as the new owner. This might involve re-negotiating or entering into new contracts. Depending on the type of business there might be certain permits or other testing required. You need to ensure that you understand the industry and identify everything you will need to have in order to begin operating the business. This is a complicated process so be sure that you are doing this due diligence as soon as possible because this is imperative for continued success.

Continued Employee Obligations

If you are taking on the existing employees, there is a lot of due diligence involved to protect your business moving forward. You need to ensure you have checked the employee records and understand what is owed to each employee. It may be beneficial to take on the employees when buying an existing business because they are already trained. However, there is a lot of financial liability associated with this, especially for long term employees. This is something you want to discuss with a lawyer before you agree to take on the existing employees in your purchase agreement.

Location Of The Business

Location is a very important part of every business. When looking at purchasing existing businesses, there is a lot of due diligence when buying businesses required to ensure you are able to continue operating there. You need to know whether you are able to take over the existing lease or if you will be entering into a new lease. If buying the building that the business operates in, then various searches must occur before you buy the business. If you buying a new franchise or moving the business, it is important that you chose a good location for that particular business. Location will have a direct affect on the success of the business, therefore proper due diligence is very important.

How Can A Lawyer Help?

These list a few general examples of due diligence involved when buying a business. However, before purchasing a business, you need to look into the complete financials and everything else associated with the business. Before signing any documents, even a letter of intent, it is important that you speak with a lawyer and get them to review the documents with you. This is a large investment and lawyers at Kahane Law want to ensure you fully understand your responsibilities and the associated liability.

Getting Help To Purchase The Right Business

To schedule a meeting with one of our corporate lawyers who will assist you with due diligence, please call 403-225-8810 in Calgary and southern Alberta or toll-free at 1-877-225-8817 or email us directly here.