The Formal Due Diligence Process
When selling your business, it’s a good idea to put yourself in the buyer’s shoes. Imagine purchasing someone else’s business: You’d want as much information as possible about their financial health, their day-to-day operations, their contractual obligations, and just about any other relevant information you could get your hands on.
This process of discovering and evaluating the financial health and market position of a business you intend to acquire is formalized in the due diligence process. Let’s take a closer look at this process: Where it starts, where it ends, how long it takes, and what documents you may need to provide to a prospective buyer.
The Letter of Intent
A letter of intent (LOI) signals that two parties intend to do business with each other - in our case, LOI’s will mean that a buyer is interested in purchasing a seller’s business. LOIs will include a non-disclosure agreement (NDA), or an NDA will have been signed before the LOI was sent.
In this LOI, the prospective buyer will include details about the documents and authorizations they will need to perform due diligence. We’ll examine some of the documents you can expect to find in such a request in the next section.
It’s important to remember that LOI’s are typically non-binding (with periodically one or two binding provisions included for items such as exclusivity or confidentiality). They cover the broad strokes of what a buyer is expecting during the purchasing process, and they will certainly highlight the price and major terms of the deal.
Documents that are commonly requested during due diligence
The documents and access that a buyer will request for due diligence will vary from industry to industry. You’ll also find variations in the timespan those documents will have to cover - one buyer might ask for 3 years of corporate tax returns, while another might ask for 5 years.
For these reasons, we can’t provide you with an exhaustive list of the documents that may be requested. We can, however, provide you with the most commonly requested documents, as well as the time span those documents should cover. These documents include:
Lease Agreements & Landlord Documentation
Canada Revenue Agency: T2 Corporate Income Tax Returns – 3 years
Accountant-prepared financial statements – 3 years
Employee T4 Statements – 3 years
Year-to-Date financial statements, as requested
Additional reports requested by the Buyer’s lender for loan approval
CRA Form AUT-01 (consent is granted to the Buyer’s accountant)
Any contractual obligations including but not limited to suppliers or subcontractors
General Ledger – 3 years & year-to-date
Bank Statements – 3 years & year-to-date
Signed Contracts
Corporate Minute Books
There are some things that the buyer should not request during due diligence. Most importantly, they shouldn’t request permission to speak to employees, customers, or vendors. And some of the due diligence items will be given immediately, and other info (eg. customer contracts) will not be given until the very end of the process after the Purchase Agreement is fully negotiated and all the approvals (landlord, lender) are granted.
How long does the due diligence process take?
The length of time it takes to perform due diligence varies - it may take several weeks or even several months. You can expedite the process by preparing the most commonly requested documents in advance, as well as by asking your accountant and your commercial business broker in BC for advice. Typically most deals involve a formal due diligence process of 60 to 90 days from time of signing Letter of Intent (“LOI”) until the deal closes.