Business Due Diligence Checklist: Complete Buyer's Guide
Master the due diligence process with our comprehensive 7-step framework. Learn what to review, documents to request, and red flags to watch for when buying a business in BC or Alberta.
Why Due Diligence Is Critical for Business Buyers
Studies show that 70-90% of business acquisitions fail to achieve their intended value. The primary reason? Inadequate due diligence. Buyers who skip or rush the due diligence process often discover hidden liabilities, customer losses, operational problems, or legal issues after closing when it's too late to walk away.
The Cost of Skipping Due Diligence
A buyer who purchased a service business without proper financial review discovered that the seller had been inflating revenue by booking non-recurring project work as ongoing revenue. Actual sustainable revenue was 40% lower than represented. The buyer overpaid by $300,000 and the business struggled from day one.
Thorough due diligence protects you by:
The 7-Step Due Diligence Framework
A comprehensive approach to reviewing every aspect of the business before you commit to the purchase.
Legal & Regulatory
Corporate structure, contracts, compliance, litigation
Financial
Statements, tax returns, revenue quality, profitability
Operational
Processes, systems, supply chain, quality control
Commercial
Customers, competition, market position, sales pipeline
Human Resources
Employees, culture, compensation, retention risks
Real Estate & Assets
Property, equipment, inventory, condition assessments
IT & Cybersecurity
Systems, data security, technology infrastructure
Professional Team Approach
Most successful buyers assemble a due diligence team including an accountant (CPA), lawyer, industry consultant, and potentially an IT specialist. Each professional focuses on their expertise area while you coordinate the overall review and maintain communication with the seller.
Detailed Due Diligence Checklists
1. Legal & Regulatory Due Diligence
Verify corporate structure, review contracts, confirm compliance, and identify legal risks
Corporate Structure & Organization
- Articles of incorporation and bylaws
- Corporate minute books and resolutions for past 5 years
- Shareholder agreements and ownership structure
- Share certificates and capitalization table
- Corporate registry searches (BC Registry, Alberta Corporate Registry)
- Confirmation of good standing with provincial authorities
Contracts & Agreements
- All customer contracts and service agreements
- Supplier and vendor contracts
- Lease agreements (premises, equipment, vehicles)
- Partnership, joint venture, or franchise agreements
- Loan agreements and security documentation
- Material contracts over $10,000 annually
- Non-compete and confidentiality agreements
- Change of control provisions in key contracts
Licenses, Permits & Compliance
- Business licenses (municipal, provincial)
- Industry-specific licenses and certifications
- Environmental permits and compliance records
- Health and safety inspection records
- WorkSafeBC (or Alberta WCB) compliance and claims history
- GST/HST registration and compliance
- Provincial sales tax registrations
- Export/import permits if applicable
Litigation & Disputes
- Pending or threatened litigation
- Past litigation and settlements (5 years)
- Regulatory investigations or violations
- Insurance claims history
- Customer complaints or disputes
- Employment disputes or wrongful dismissal claims
- Warranty claims and product liability issues
BC/Alberta Specific: Verify compliance with provincial employment standards, privacy laws (PIPA in BC/Alberta), and industry-specific regulations. Check for any environmental assessments required under provincial environmental management acts.
2. Financial Due Diligence
Verify financial performance, analyze profitability trends, and validate revenue quality
Financial Statements & Records
- Income statements (past 3-5 years and year-to-date)
- Balance sheets (past 3-5 years and current)
- Cash flow statements (past 3 years)
- Monthly financial statements for past 24 months
- Aged accounts receivable and accounts payable
- General ledger and trial balances
- Bank statements (past 24 months)
- Bank reconciliations and outstanding checks
Tax Returns & Compliance
- Corporate income tax returns (past 5 years)
- GST/HST returns and remittances (past 3 years)
- Provincial sales tax returns if applicable
- Payroll tax remittances and T4 summaries
- CRA notices of assessment and reassessment
- Outstanding tax liabilities or payment plans
- Transfer pricing documentation if applicable
- Scientific Research & Experimental Development (SR&ED) claims
Revenue Analysis
- Customer list with annual revenue by customer
- Revenue concentration analysis (top 10 customers)
- Revenue by product/service line breakdown
- Recurring vs. one-time revenue split
- Sales pipeline and backlog analysis
- Contract renewal rates and customer retention metrics
- Seasonal revenue patterns and trends
- Pricing strategy and recent price changes
Expenses & Profitability
- Cost of goods sold (COGS) breakdown and trends
- Operating expense analysis by category
- Owner-related expenses (salary, benefits, personal use)
- One-time or non-recurring expenses
- Related party transactions and management fees
- Gross margin and EBITDA trends
- Seller's Discretionary Earnings (SDE) calculation
- Working capital requirements and seasonal fluctuations
Debt, Liabilities & Obligations
- All outstanding debt agreements and balances
- Lease obligations (operating and capital)
- Lines of credit and credit facilities
- Personal guarantees and security given
- Contingent liabilities and off-balance sheet items
- Deferred revenue and customer deposits
- Warranty reserves and product liability estimates
- Employee vacation accruals and bonus obligations
Key Financial Red Flags:
- • Discrepancies between tax returns and financial statements
- • Declining revenue or profitability trends
- • Customer concentration over 20% in single customer
- • Increasing accounts receivable aging
- • Unexplained cash flow vs. profit differences
- • Missing or incomplete financial records
3. Operational Due Diligence
Assess business processes, supply chain, quality control, and operational efficiency
Business Processes & Systems
- Standard operating procedures (SOPs) documentation
- Process flowcharts and workflow diagrams
- Quality control and quality assurance procedures
- Inventory management systems and processes
- Production capacity and utilization rates
- Order fulfillment and delivery processes
- Customer service procedures and protocols
- Key performance indicators (KPIs) and metrics
Supply Chain & Vendors
- List of key suppliers and vendors
- Supplier concentration and dependencies
- Supply agreements and pricing terms
- Lead times and delivery reliability
- Alternative supplier options and switching costs
- Raw material and component sourcing
- Supply chain disruption risks and contingencies
- Purchasing volume and discount arrangements
Facilities & Production
- Facility condition assessment and maintenance records
- Equipment inventory and condition
- Production capacity and throughput analysis
- Maintenance schedules and capital expenditure plans
- Health and safety compliance and incident records
- Environmental compliance and permits
- Waste disposal and environmental management
- Utilities and infrastructure adequacy
Operational Red Flags: Single-source supplier dependencies, aging or poorly maintained equipment, lack of documented processes, high customer complaint rates, or significant reliance on owner's technical expertise without succession planning.
4. Commercial Due Diligence
Evaluate market position, customer relationships, competition, and growth potential
Customer Analysis
- Complete customer list with revenue history
- Customer concentration and diversification
- Top 20 customers (revenue, profitability, tenure)
- Customer retention and churn rates
- Customer acquisition costs and payback periods
- Customer satisfaction scores and feedback
- Contract renewal rates and upcoming renewals
- Customer interviews or reference checks
Market & Competition
- Market size and growth trends (BC/Alberta focus)
- Market share and competitive positioning
- Competitive landscape and key competitors
- Competitive advantages and differentiators
- Barriers to entry and competitive threats
- Industry trends and disruption risks
- Regulatory changes affecting the industry
- Market research and customer surveys
Sales & Marketing
- Sales pipeline and forecasting accuracy
- Sales process and cycle length
- Marketing strategies and channels
- Marketing expenses and ROI by channel
- Brand reputation and online presence
- Website traffic and conversion metrics
- Customer acquisition strategies and costs
- Sales team structure and compensation
Commercial Strength Indicators: Diversified customer base, long-term customer relationships, recurring revenue model, strong brand recognition, documented sales processes, and consistent customer acquisition.
5. Human Resources Due Diligence
Review employee agreements, compensation, culture, and retention risks
Employee Information
- Complete employee list (names, titles, tenure, compensation)
- Organizational chart and reporting structure
- Employment agreements and offer letters
- Contractor vs. employee classification documentation
- Employee handbook and policies
- Non-compete and non-solicitation agreements
- Key employee retention agreements
- Management team resumes and backgrounds
Compensation & Benefits
- Salary, wage, and commission structures
- Bonus and incentive programs
- Benefits packages (health, dental, RRSP matching)
- Vacation accruals and policies
- Stock options or equity compensation
- Severance and termination obligations
- Union agreements or collective bargaining
- Payroll records and employment tax compliance
Employment Law & Compliance
- BC Employment Standards Act / Alberta Employment Standards Code compliance
- WorkSafeBC or Alberta WCB coverage and claims
- Human rights and harassment policies
- Employee privacy compliance (PIPA)
- Recent terminations and severance payments
- Employment disputes or complaints
- Immigration and work permit compliance
- Training and development programs
Culture & Retention
- Employee turnover rates and exit interview data
- Key person dependencies and succession plans
- Employee engagement and satisfaction surveys
- Company culture and values assessment
- Performance management and review processes
- Retention risk for critical employees post-sale
- Remote work policies and arrangements
- Professional development and career paths
BC/Alberta HR Considerations: Provincial employment standards vary. BC has different minimum wage, overtime, and termination notice requirements than Alberta. Verify compliance with the specific provincial regulations where employees are located.
6. Real Estate & Asset Due Diligence
Assess property, equipment, inventory, and physical asset condition
Real Property (If Owned)
- Title search and ownership verification
- Property survey and legal description
- Zoning compliance and permitted uses
- Environmental site assessment (Phase I and II if needed)
- Property appraisal and market value
- Property tax assessments and arrears
- Building permits and compliance certificates
- Property insurance and coverage
Leased Property
- Lease agreement and all amendments
- Remaining lease term and renewal options
- Base rent and operating cost obligations
- Assignment and subletting provisions
- Landlord consent requirements for sale
- Tenant improvement allowances and responsibilities
- Maintenance and repair obligations
- Lease security deposits and guarantees
Equipment & Fixed Assets
- Complete equipment inventory and asset list
- Equipment condition and maintenance records
- Equipment appraisal and fair market value
- Owned vs. leased equipment schedule
- Equipment lease agreements and buyout terms
- Remaining useful life and replacement schedule
- Warranty coverage and service agreements
- Capital expenditure plans and budgets
Inventory
- Physical inventory count and valuation
- Inventory aging and obsolescence analysis
- Inventory turnover rates and management
- Raw materials, work-in-process, and finished goods
- Consignment inventory and ownership
- Inventory financing and security interests
- Write-offs and inventory reserves
- Seasonal inventory patterns
Environmental Risk Alert: Manufacturing, automotive, dry cleaning, and other industrial businesses in BC/Alberta may have soil contamination or environmental liabilities. Always conduct Phase I Environmental Site Assessment before closing.
7. IT Systems & Cybersecurity Due Diligence
Review technology infrastructure, data security, and digital assets
Technology Infrastructure
- Complete IT systems inventory and architecture
- Software licenses and subscription agreements
- Cloud services and SaaS platforms
- Hardware inventory (servers, computers, network equipment)
- IT support and managed services agreements
- Technology roadmap and upgrade plans
- IT budget and annual technology spending
- Business continuity and disaster recovery plans
Cybersecurity & Data Protection
- Cybersecurity policies and procedures
- Data backup systems and recovery testing
- Firewall and network security configuration
- Antivirus and malware protection
- Employee access controls and permissions
- Multi-factor authentication implementation
- Security breach history and incident response
- Privacy policy and PIPA compliance (BC/Alberta)
Digital Assets & Intellectual Property
- Website ownership and hosting agreements
- Domain name registrations and renewals
- Social media accounts and credentials
- Customer databases and CRM systems
- Proprietary software and source code
- Digital marketing assets (email lists, content)
- Trade secrets and confidential information
- Technology transfer and transition plans
Technology Risk Assessment: Evaluate whether systems can be transferred easily, if critical systems are owned vs. licensed, and if there are key person dependencies for system maintenance. Many small businesses run on outdated technology that requires immediate investment post-acquisition.
8. Intellectual Property Due Diligence (If Applicable)
Verify ownership and protection of trademarks, patents, copyrights, and trade secrets
IP Portfolio Review
- Trademark registrations (Canadian Intellectual Property Office)
- Patent applications and granted patents
- Copyright registrations and ownership
- Trade secrets and confidential information inventory
- Domain name registrations and disputes
- Brand names, logos, and marketing materials
- Product designs and industrial designs
- IP licensing agreements (inbound and outbound)
IP Ownership & Protection
- Evidence of ownership and chain of title
- Employee IP assignment agreements
- Contractor IP assignment agreements
- Freedom to operate analysis (no infringement of others' IP)
- IP infringement claims or disputes
- Maintenance fees and renewal status
- IP insurance coverage
- IP valuation and contribution to business value
IP Transfer Consideration: Ensure all intellectual property can be cleanly transferred to the buyer. Review all employee and contractor agreements to confirm IP was properly assigned to the company. Missing IP assignments are a common deal-killer.
Due Diligence Timeline: What to Expect
| Phase | Timeline | Activities | Key Deliverables |
|---|---|---|---|
| Phase 1: Planning & Initial Review | Week 1-2 | Assemble due diligence team, Sign NDA and LOI, Receive initial data room access, Develop due diligence checklist | Due diligence workplan, Team assignments, Initial document request list |
| Phase 2: Financial Review | Week 3-6 | Review financial statements and tax returns, Analyze revenue and profitability trends, Validate working capital, Interview accountant, Perform quality of earnings analysis | Financial due diligence report, Normalized EBITDA/SDE calculation, Working capital analysis |
| Phase 3: Legal & Regulatory | Week 4-7 | Corporate structure review, Contract review (customers, suppliers, leases), Litigation search, Compliance verification, IP ownership confirmation | Legal due diligence memo, Contract summary, Title opinions, Compliance checklist |
| Phase 4: Operational & Commercial | Week 5-8 | Operations site visit, Customer interviews, Supplier assessment, Market analysis, Competition review, Management interviews | Operational assessment report, Customer concentration analysis, Market position review |
| Phase 5: HR & IT Review | Week 7-9 | Employee census review, Key person assessment, Benefits and compensation review, IT systems assessment, Cybersecurity evaluation | HR risk assessment, Retention plan, IT infrastructure report |
| Phase 6: Integration Planning | Week 9-11 | Identify integration priorities, Develop transition plan, Address outstanding issues, Negotiate final terms, Finalize representations and warranties | 100-day integration plan, Final diligence report, Issues list |
| Phase 7: Final Review & Closing | Week 11-12 | Review final diligence findings with team, Address critical issues or renegotiate, Finalize purchase agreement, Prepare closing documents | Final purchase agreement, Closing checklist, Go/no-go recommendation |
Small Business (Under $2M)
Typical timeline: 6-8 weeks
Smaller businesses with straightforward operations and clean records can often complete due diligence faster.
Mid-Sized Business ($2M-$10M)
Typical timeline: 8-12 weeks
Standard timeline for most BC/Alberta business acquisitions with moderate complexity.
Complex Business (Over $10M)
Typical timeline: 12-16+ weeks
Larger businesses with multiple locations, complex operations, or regulatory requirements need extended timelines.
Major Red Flags & How to Assess Risk
Financial Red Flags
Revenue decline masked by one-time gains
CriticalResponse: Request detailed revenue breakdown by source. Recalculate normalized earnings excluding non-recurring items.
Discrepancies between tax returns and financial statements
CriticalResponse: Require seller explanation in writing. Engage forensic accountant if material. May indicate fraud.
Customer concentration over 20% in single customer
HighResponse: Interview major customers. Negotiate customer retention agreements or purchase price adjustment.
Rapidly increasing accounts receivable
HighResponse: Review AR aging detail. Assess collection policies and customer credit quality.
Legal Red Flags
Pending or threatened litigation
CriticalResponse: Obtain litigation details, legal opinions, and reserve estimates. May require price adjustment or indemnification.
Environmental compliance violations
CriticalResponse: Conduct Phase I (or Phase II) environmental assessment. Estimate remediation costs. Consider deal-breaker.
Key contracts not assignable without consent
HighResponse: Obtain landlord, customer, and supplier consents before closing. Make closing conditional on consents.
Unclear IP ownership or employee IP assignments missing
HighResponse: Require seller to obtain retroactive IP assignments. May need to reduce price if IP cannot be secured.
Operational Red Flags
No documented processes or SOPs
MediumResponse: Plan for significant operational documentation post-acquisition. Budget time and resources.
Single-source supplier dependency
HighResponse: Identify alternative suppliers. Negotiate long-term supply agreements with existing supplier.
Aging equipment with no replacement plan
MediumResponse: Obtain equipment appraisals. Budget for capital expenditures. Adjust purchase price accordingly.
High customer complaint rates
MediumResponse: Review complaint patterns and resolution processes. Assess impact on customer retention and reputation.
People & Culture Red Flags
Key employee departure announcements
CriticalResponse: Interview key employees confidentially. Develop retention packages. May be deal-breaker if critical talent leaves.
High employee turnover (over 30% annually)
HighResponse: Investigate root causes. Review compensation vs. market. Assess culture and management issues.
Significant owner-dependent relationships
HighResponse: Require seller transition period. Develop relationship transfer plan. Consider earnout structure.
Employment law violations or pending claims
HighResponse: Assess potential liability. Require seller indemnification. Implement compliance improvements post-close.
🎯When to Walk Away vs. Renegotiate
Walk Away If:
- • Seller has committed fraud or material misrepresentation
- • Environmental liabilities exceed business value
- • Major customers are leaving or contracts won't transfer
- • Undisclosed litigation threatens business viability
- • Financial records are incomplete or unreliable
- • Seller is unwilling to provide requested information
Renegotiate If:
- • Revenue is lower than represented but stable
- • Identified liabilities can be quantified and adjusted for
- • Equipment needs replacement sooner than disclosed
- • Working capital is lower than anticipated
- • Customer concentration is higher than represented
- • Key employee retention risks can be mitigated
Building Your Due Diligence Team
Accountant / CPA
Essential for all acquisitions
Key Responsibilities:
- →Review financial statements and tax returns
- →Perform quality of earnings analysis
- →Calculate normalized EBITDA or SDE
- →Assess working capital requirements
- →Identify financial statement adjustments
- →Structure tax-efficient purchase
Business Lawyer
Essential for all acquisitions
Key Responsibilities:
- →Review corporate structure and documents
- →Analyze all contracts and agreements
- →Conduct litigation and lien searches
- →Verify regulatory compliance
- →Draft or review purchase agreement
- →Handle closing and document execution
Business Broker / M&A Advisor
Highly recommended for first-time buyers
Key Responsibilities:
- →Coordinate due diligence process
- →Facilitate seller communication
- →Provide industry benchmarking data
- →Assess operational risks
- →Support price negotiation
- →Manage timeline and deliverables
Industry Consultant / Expert
Recommended for complex or unfamiliar industries
Key Responsibilities:
- →Assess operational capabilities
- →Evaluate competitive position
- →Review technical processes
- →Identify industry-specific risks
- →Validate growth assumptions
- →Provide post-acquisition guidance
IT / Cybersecurity Specialist
Recommended for tech-dependent businesses
Key Responsibilities:
- →Review IT infrastructure and systems
- →Assess cybersecurity vulnerabilities
- →Evaluate data backup and recovery
- →Identify technology risks and liabilities
- →Estimate IT upgrade costs
- →Plan technology transition
Environmental Consultant
Required for manufacturing, industrial, or property-heavy businesses
Key Responsibilities:
- →Conduct Phase I Environmental Assessment
- →Conduct Phase II if contamination suspected
- →Review environmental permits and compliance
- →Assess remediation costs if needed
- →Identify environmental liabilities
- →Provide environmental risk report
Total Due Diligence Cost Estimate
For a typical small to mid-sized BC or Alberta business acquisition ($500K - $5M), expect to invest $20,000 - $60,000 in professional due diligence fees. While this seems expensive, it's a small price to pay compared to the cost of discovering major issues after closing. Think of due diligence as insurance against catastrophic mistakes.
Budget Guideline: Plan to spend 2-4% of the purchase price on due diligence and professional fees. A $2M acquisition should budget $40,000 - $80,000 for advisors, due diligence, and closing costs combined.
Frequently Asked Questions
What is business due diligence?
Business due diligence is the comprehensive investigation a buyer conducts before purchasing a business. It involves reviewing financial records, legal documents, operations, customer relationships, and assets to verify the seller's claims and identify risks. Due diligence typically takes 8-12 weeks and covers 7 key areas: legal, financial, operational, commercial, human resources, real estate/assets, and IT/cybersecurity.
How long does business due diligence take?
A thorough due diligence process typically takes 8-12 weeks for a small to mid-sized business. The timeline breaks down as: Initial review and planning (1-2 weeks), Financial due diligence (3-4 weeks), Legal and regulatory review (2-3 weeks), Operational and commercial assessment (2-3 weeks), Final integration planning (1-2 weeks). Complex or larger transactions may extend to 16+ weeks.
What documents are needed for business due diligence?
Key documents include: 3-5 years of financial statements and tax returns, customer and supplier contracts, employee agreements and HR records, lease agreements and asset documentation, intellectual property registrations, insurance policies, corporate minute books and shareholder agreements, licenses and permits, litigation records, and operational procedures documentation. Sellers should prepare a comprehensive data room with organized documents before due diligence begins.
What are the biggest red flags in business due diligence?
Major red flags include: Financial inconsistencies between tax returns and reported earnings, customer concentration (one customer representing >20% of revenue), pending or undisclosed litigation, environmental compliance issues, employment law violations, unreported liabilities or contingent obligations, declining revenue trends disguised by one-time gains, poor financial controls or missing documentation, IP ownership disputes, and seller unwillingness to provide requested information.
Who should conduct business due diligence?
A due diligence team typically includes: The buyer or their representative, an accountant or financial advisor (CPA) for financial review, a lawyer for legal and regulatory compliance, an industry expert or operational consultant, an IT/cybersecurity specialist for tech businesses, and potentially an environmental consultant for manufacturing or real estate. Each professional focuses on their area of expertise to provide comprehensive risk assessment.
Can I negotiate price after due diligence?
Yes, due diligence findings often lead to price renegotiation. If material issues are discovered such as undisclosed liabilities, customer losses, revenue declines, or compliance problems, buyers typically request a purchase price adjustment, seller remediation of issues before closing, extended warranties and indemnifications, or holdback provisions in the purchase agreement. The Letter of Intent should specify that the purchase price is subject to satisfactory due diligence.
Complete Your Buyer Education
Letter of Intent Guide
Learn what to include in your LOI before starting due diligence
Business Valuation Methods
Understand how to value the business you're buying
SBA Loans for Buyers
Financing options for Canadian business acquisitions
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