Buying an established business can give you customers, employees, equipment, and revenue from day one. Those advantages also come with obligations and risks that may stay hidden until someone with experience takes a closer look. Working with a corporate lawyer in Edmonton during due diligence can help a buyer understand what is being purchased and identify issues that may affect the deal.
What Due Diligence Means
Due diligence is the investigation a buyer conducts before completing the purchase of a business. It usually begins after the parties have agreed on the basic terms of a potential transaction and concludes before closing.
The process gives the buyer an opportunity to verify information provided by the seller. Its scope depends on the size and type of business, the structure of the transaction, and any concerns that emerge during the review. A small retail operation will require a different due diligence investigation than a company with numerous employees, several locations, valuable intellectual property, or complex commercial contracts.
Reviewing the Company’s Finances
Financial records are a major part of due diligence because they help show how the business has been performing in terms of profit or loss. Buyers may review financial statements, tax returns, accounts receivable, accounts payable, existing loans, and cash flow records.Â
This review can also uncover liabilities that affect the value of the company. Outstanding debts, unpaid taxes, unusual expenses, or customers who routinely fail to pay their invoices may change how attractive the purchase looks. Buyers can use what they learn during due diligence to reconsider or negotiate the purchase price or other deal terms.
Looking at Contracts and Legal Obligations
A business may have contracts with landlords, suppliers, customers, lenders, distributors, and service providers. During due diligence, these arrangements can be reviewed to determine what obligations will continue after the transaction and whether the purchase affects existing contractual rights as some contracts require another party’s consent before they can be assigned to a buyer.
Examining Employees and Business Assets
Employee issues and matters can carry significant obligations for a purchaser. A due diligence review may cover employment agreements, compensation, benefits, workplace policies, accrued vacation time, contractor arrangements, and existing employment disputes. The information gleaned from this review can help the buyer determine how to handle employees after ownership changes.
Business assets deserve similar attention. Equipment, inventory, real estate interests, trademarks, software, domain names, and other intellectual property may form a substantial portion of the purchase price. Buyers should confirm who owns those assets and determine how to transfer them.
Checking for Disputes and Regulatory Problems
Existing or threatened legal disputes can expose a new owner to costs that were never included in the original plan. Due diligence may include searches and document reviews for lawsuits, regulatory proceedings, judgments, security interests, and other legal claims connected with the business.
Licenses and permits also matter in regulated industries. Buyers need to know which approvals the business currently holds, whether they remain valid after the transaction closes, and what steps may be required to continue operating after closing. This also gives a buyer time to obtain any missing licenses or permits or transfer them into their name.
Conclusion
Due diligence gives a buyer a clearer picture of the business before the purchase becomes final. A careful review by an experienced corporate lawyer can uncover financial obligations, contractual restrictions, ownership concerns, employment issues, and legal risks while there is still time to address them.
