Due diligence checklist for buying a business in BC

A signed letter of intent usually opens a short window to look behind the asking price. What you check in that window decides how much you really know about the business before you are bound to buy it.

This checklist sets out the legal items a buyer in British Columbia should work through, from registry searches and the lease to employees and the tax steps that can leave a buyer answering for the seller's debts.

Start with the structure of the deal

What you need to check depends on what you are buying. In a share purchase you take over the company itself, with its history, contracts and liabilities, so the review covers the whole company. In an asset purchase you choose the assets and the company stays with the seller, but some obligations follow the business anyway, as the employment and tax items below show. Our guide to share purchases and asset purchases explains that choice, and our overview of the legal steps of buying a business shows where due diligence fits in the deal as a whole.

Ask for documents early, keep a running list of what is still missing, and watch the due diligence or condition date in your letter of intent. Once that date passes, your options can narrow quickly.

Company records and ownership

• BC Registries search. Confirm the company is active and check its registered and records office addresses, its directors and officers, and when it last filed an annual report. A Certificate of Good Standing can also be ordered.
• Shareholders and the minute book. The public registry does not show shareholders or share details. In a share purchase, ask for the minute book: the articles, the central securities register, directors' and shareholders' resolutions, and any shareholders' agreement.
• Who owns the assets. In an asset purchase, confirm that the selling company actually holds title to the equipment, vehicles, trade names, domain names and other assets on the list, rather than an owner personally or a related company.

Searches for liens, title and lawsuits

• Personal Property Registry. Security interests and liens against personal property, such as equipment, vehicles and inventory, are registered at the Personal Property Registry. Online searching is limited to professional accounts, so your lawyer will usually run the search against the seller's exact legal name. Each registration you find needs to be paid out, discharged or knowingly taken on.
• Land title. If real estate is part of the deal, or the company owns land, a title search through the Land Title and Survey Authority (LTSA) shows the registered owners and the charges, liens and interests registered against the title. The search runs on the parcel identifier (PID), not the street address.
• Court files. BC court records can be searched through Court Services Online. Also ask the seller to disclose, in writing, any claims or disputes that have been threatened but not yet filed.

Lease, contracts and licences

• The premises lease. Check the remaining term, renewal options and rent, and read the assignment clause closely. Commercial leases commonly require the landlord's consent to an assignment, and some treat a change in control of a tenant company the same way.
• Key contracts. List the customer, supplier, franchise and equipment-lease agreements the business depends on, and check each one for consent requirements, change-of-control clauses and termination rights.
• Licences and permits. Identify every licence, permit and registration the business operates under, and confirm whether each one can move to you or whether you need your own before closing.
• Intellectual property. Confirm who owns the business name, trademarks, website, social media accounts and key software licences, and how each one will be transferred.

Employees and WorkSafeBC

• Employee information. Get each employee's start date, pay, vacation owing and any written contract, plus a list of contractors and what they do.
• Continuity of employment. Under section 97 of the Employment Standards Act, when all or part of a business is sold, the employment of employees who stay on is deemed continuous and uninterrupted by the sale. The Province's guidance explains that the buyer takes on their prior service, which affects termination pay and vacation later. In a share purchase, the employer does not change at all.
• WorkSafeBC clearance. WorkSafeBC advises buyers to contact it before buying any assets from a firm: if the seller owes premiums, its assets may be subject to a lien in WorkSafeBC's favour. A clearance letter protects the purchaser against those liens. For an asset purchase, the clearance is requested from WorkSafeBC directly rather than through its online tool.

PST, GST and the seller's tax position

• PST clearance certificate. Before buying a business, the purchaser should obtain a clearance certificate confirming that the seller has paid all PST, penalties and interest. Without one, the purchaser is liable for an amount equal to any outstanding amount the seller owes. The application, made online or on form FIN 447, needs the seller's consent.
• PST on the assets. PST applies to taxable business assets such as equipment, tools and computer hardware, but not to inventory bought for resale, goodwill or real property. If the seller does not charge PST on taxable assets, you generally have to self-assess it.
• GST/HST election. If you acquire all or substantially all (at least 90%) of the property reasonably needed to carry on the business, you and the seller may be able to jointly elect on Form GST44 so that no GST/HST is payable on the sale. The election is not available if the seller is a GST/HST registrant and you are not, and the form must be filed by the due date of your return for the first reporting period in which you would otherwise have paid the tax.
• Financial and tax records. Review several years of financial statements, tax returns and Canada Revenue Agency account balances with your accountant. In a share purchase, the company's tax history comes with it.

Turning what you find into the deal

Due diligence only helps if the results reach the purchase agreement. Issues can be handled through a price adjustment, a holdback, specific representations and indemnities from the seller, or conditions that must be met before closing. Sometimes the right answer is not to proceed.

Keep a written list of open issues, and make sure each one is resolved, priced or covered in the agreement before you remove your conditions.

Signed a letter of intent? Get the due diligence done before you commit

Our business purchase and sale lawyers can run the registry and title searches, review the minute book, lease, contracts and employment records, and build what we find into the purchase agreement.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.