Due diligence is the most important phase of any business acquisition. Skipping steps or rushing through the process can lead to costly surprises after closing. This checklist covers the essential areas every buyer should investigate.
Financial Due Diligence
Review three years of financial statements, tax returns, bank statements, and accounts receivable and payable aging reports. Verify that reported revenues match bank deposits and POS data. Calculate the true Seller Discretionary Earnings by adding back owner compensation, one-time expenses, and non-cash charges.
Legal Due Diligence
Examine all contracts, leases, and agreements. Verify corporate standing, intellectual property ownership, and any pending or threatened litigation. Review employee agreements and confirm compliance with BC Employment Standards.
Operational Due Diligence
Assess equipment condition, inventory valuation methods, supplier relationships, and customer concentration. A business where one customer accounts for more than twenty percent of revenue carries meaningful risk.
Regulatory and Compliance
Confirm all licenses and permits are current and transferable. In BC, this includes municipal business licenses, provincial permits, WorkSafeBC registration, and industry-specific certifications.
Environmental and Property
For businesses with physical premises, check for environmental liabilities, zoning compliance, and building code issues. Phase I environmental assessments may be required for certain property types.
Employee and HR Review
Understand staffing levels, compensation structure, key-person dependencies, and any outstanding HR issues. In BC, buyers who acquire a business as a going concern may inherit certain employee obligations.
A methodical approach to due diligence protects your investment and often reveals negotiation points that can improve your purchase terms.