What is a due diligence?

Both in Canada and in Quebec, it is strongly recommended, before proceeding to the purchase of a business, to put as a prior condition that the purchaser has the faculty to make a due diligence to its satisfaction within a certain time limit.

The due diligence is carried out on all the essential information related to the operation of the business; it must allow the purchaser to have an evaluation of the financial, tax and legal situation of the business.

In Quebec, the scope of the due diligence can vary according to the nature of the business; it should concern among others the following points :

• The legal status of the business;
• The financial statements;
• The assets of the business, such as the equipment and the intellectual property rights;
• The permits necessary for the operation of the business;
• The inventories;
• The hypothecs (also called mortgages) and other charges affecting the property of the business;
• The clients and the accounts receivable;
• The important contracts and the suppliers;
• The list of employees, the employment contracts, the collective agreement, the file of the business with the CNESST;
• The commercial lease, if the business is operated in rented premises;
• The debts and the contingent liabilities;
• The payment of the withholding deductions for employees (SD) and the taxes (GST and QST);
• The insurance policies;
• The existing legal disputes involving the business;
• The applicable legislation and regulations, etc.

Given that several of these information are confidential, the offer to purchase should be accompanied by a confidentiality agreement.