Dissecting the deal: due diligence.

• Author: Bissonette, Laurie
• Position: Business Sense - Viewpoint essay

It is crucial to ensure that you "do your homework," right off the starting block, in contemplating any deal. As well, it is equally critical to know your options as a vendor. The process should not be taken lightly. It can significantly impact on the value of the deal and is best undertaken with professional assistance to avoid missing important areas of risk.

Very recently, I heard the story of a gentleman and his shareholders who had a falling out and the matter had gone to court. While the court felt that the right thing was done in securing a long-term payout for the shareholder, the result was immediate taxation of all proceeds, without the cash to make the tax payment. Ouch! Should a negotiated settlement have been reached with a tax practitioner to indicate options, things would likely have turned out differently.

Due diligence is a catch-all term to describe the process undertaken by a potential buyer to understand the nature of the transaction: what is being purchased, what risks may exist, the key drivers of the business, verification of the information provided by the seller and assuring that the buyer has all the information required to proceed with the transaction. The extent of due diligence depends on whether the buyer is buying assets or shares of a company. Sometimes it isn't clear what is included with the business. There may be items used in a business that are owned by another company or loaned by "Uncle John."

You need to ensure you have access to all of the assets used in the business and not just those owned by the company. The process generally proceeds quickly as it will be essential to complete prior to closing the deal.

For a vendor, the process can seem invasive, as a significant amount of information may need to be disclosed. It may be prudent to ask the buyer to sign a non-disclosure agreement (NDA). Legal advice should be sought to determine the necessity.

The results of due diligence can sometimes change the pricing set out in the letter of intent (LOI). Take a situation where a buyer is buying assets and as part of the due diligence, inspects the inventory only to find that it contain obsolete items which may not be saleable. If the price set out in the LOI had been based on the premise that all inventory would be saleable at a certain profit margin, this discovery may lead the...