Due Diligence When Buying a Business in Alberta: What to Review Before You Close
Conducting thorough due diligence before buying a business is one of the most important steps in any acquisition. It is the process through which a buyer investigates the target business to verify the information provided by the seller, uncover potential risks, and confirm that the deal represents sound value. In Alberta, this process involves legal, financial, operational, and regulatory dimensions — each of which can reveal issues that affect the purchase price, deal structure, or whether the transaction proceeds at all.
Skipping or rushing due diligence is one of the most common and costly mistakes buyers make. A thorough investigation before closing protects your investment and positions you to negotiate from a place of knowledge rather than assumption.
Why Due Diligence Matters When Buying a Business
A business may look profitable on the surface, but underlying issues — undisclosed liabilities, deteriorating customer relationships, pending regulatory action, or poorly drafted contracts — can significantly reduce its value or create problems after closing. Due diligence when buying a business is your opportunity to look behind the curtain and understand exactly what you are acquiring.
The findings from due diligence often inform key terms of the purchase agreement, including representations and warranties, indemnification provisions, purchase price adjustments, and conditions to closing. In many cases, due diligence reveals issues that can be addressed through negotiation rather than walking away from the deal.
Financial Due Diligence
Financial due diligence involves a detailed review of the target company’s financial health and performance. This is typically conducted alongside your accountant or financial adviser, but your legal counsel should also be aware of the findings, as financial issues often have legal implications.
Key areas to review include the company’s financial statements for the past three to five years, looking for trends in revenue, profitability, and cash flow. You should examine the quality of the company’s earnings — are profits driven by recurring revenue, or are they dependent on one-time events or a small number of clients?
Tax compliance is another critical area. Reviewing filed tax returns, outstanding assessments, and any correspondence with the Canada Revenue Agency (CRA) helps identify potential tax liabilities. In a share purchase, unpaid taxes become the buyer’s responsibility, making this review particularly important.
Accounts receivable and accounts payable should be aged and examined for collectability and accuracy. Outstanding debts, lines of credit, and any personal guarantees provided by the current owner also need to be identified and addressed in the transaction documents.
Legal Due Diligence
Legal due diligence focuses on the corporate structure, contracts, litigation history, and regulatory standing of the target business. This is where your M&A lawyer plays a central role.
Corporate Records
The target company’s corporate records — often referred to as the minute book — should be reviewed for completeness and accuracy. This includes articles of incorporation, bylaws, shareholder agreements, director and officer appointments, and share issuance records. Gaps or irregularities in the minute book can create problems with ownership verification and may need to be remedied before closing.
In Alberta, corporations are governed by the Business Corporations Act (Alberta) or the Canada Business Corporations Act, depending on the jurisdiction of incorporation. The applicable legislation determines the rules around share transfers, director obligations, and corporate governance.
Contracts and Agreements
A review of all material contracts is essential. This includes customer and supplier agreements, commercial leases, equipment leases, employment contracts, non-competition agreements, licensing arrangements, and any other agreements that are important to the ongoing operation of the business.
You should look for change-of-control provisions, termination clauses, exclusivity arrangements, and any terms that could be triggered by the acquisition. Contracts that are poorly drafted, expired, or operating on informal terms present risk and should be flagged for renegotiation or replacement.
Litigation and Disputes
Any pending, threatened, or historical litigation involving the target company should be reviewed. This includes civil lawsuits, regulatory proceedings, employment disputes, and insurance claims. Understanding the nature and potential financial exposure of any outstanding claims is critical, particularly in a share purchase where the buyer assumes these liabilities.
Intellectual Property
If the business relies on trademarks, patents, copyrights, trade secrets, or proprietary technology, these assets need to be verified. Confirm that the intellectual property is properly registered (where applicable), owned by the corporation rather than an individual, and not subject to any disputes or licensing restrictions that could affect its use after closing.
Operational Due Diligence
Beyond the financials and legal documents, understanding how the business actually operates on a day-to-day basis is important for assessing its sustainability and identifying areas that may require investment after closing.
Employees and Key Personnel
Review the target company’s workforce, including the number of employees, their roles, compensation levels, benefits, and any employment agreements in place. Identify key employees whose departure could materially affect the business, and consider whether retention agreements or non-competition arrangements are appropriate.
In Alberta, the Employment Standards Code governs minimum employment standards, and the transition of employees in an asset purchase versus a share purchase has different implications for continuity of employment, accrued entitlements, and termination obligations.
Customers and Revenue Concentration
Assess the diversification of the company’s customer base. A business that derives a disproportionate share of its revenue from one or two clients presents a concentration risk — if those clients leave after the acquisition, the impact on revenue could be significant.
Review customer contracts for their remaining terms, renewal prospects, and any clauses that allow termination upon a change of ownership.
Suppliers and Supply Chain
Evaluate the company’s key supplier relationships and any dependencies on particular vendors. Review supply agreements for pricing terms, exclusivity arrangements, and any risks related to supply chain disruption.
Regulatory and Environmental Due Diligence
Depending on the industry, regulatory compliance can be a significant area of due diligence. Businesses operating in regulated sectors — such as energy, cannabis, food services, or professional services — may require specific licences, permits, or approvals that need to be verified and, in some cases, transferred or renewed as part of the transaction.
Environmental due diligence is particularly relevant in Alberta given the province’s resource-based economy. If the target business owns or leases real property, a Phase I Environmental Site Assessment may be warranted to identify potential contamination issues. Environmental liabilities can be substantial and, in a share purchase, transfer to the buyer along with the corporation.
Putting Due Diligence Findings to Work
The value of due diligence lies not only in identifying problems but in using those findings to shape the transaction. Issues uncovered during due diligence commonly result in purchase price adjustments or holdbacks to account for identified risks, additional representations and warranties from the seller addressing specific concerns, indemnification provisions that allocate risk between the parties, conditions to closing that require the seller to resolve certain issues before the deal completes, and in some cases, a restructuring of the deal from a share purchase to an asset purchase (or vice versa) to manage liability exposure.
A well-conducted due diligence process when buying a business gives you the information you need to make an informed decision about the transaction and to negotiate terms that protect your investment.
Taking the Next Step
Due diligence is a collaborative effort that typically involves your legal counsel, accountant, and other advisers working together to build a complete picture of the target business. Starting this process early — ideally before signing a binding agreement — ensures that you have adequate time to conduct a thorough review and address any issues that arise.
If you are considering acquiring a business in Alberta, engaging legal counsel who regularly handle M&A transactions can help you plan and execute a due diligence process tailored to your specific deal. You can begin by booking a consultation with our team.