What due diligence does a lender do on a business purchase loan?

When you borrow to buy a business, any review the lender carries out serves its own decision about whether to lend. It is a separate process from the due diligence you do on the business, and the two should not be confused. Ask your lender in writing what it will review and what it will need from you.

What the federal program requires of lenders

The Canada Small Business Financing Regulations say that in making and administering a loan, the lender must apply the same procedures as those that would be applied for a conventional loan in the same amount, including, before making the loan, obtaining credit references or conducting a credit check on the borrower and any persons legally or financially responsible for the borrower, and completing an assessment of the borrower’s repayment ability, taking into account all of the borrower’s other financial obligations. The program’s guidelines add that these due diligence requirements apply to approval and also to administering and realizing the loan. A claim for loss must include the lender’s acknowledgement that it acted with due diligence in applying those procedures and has taken the measures described in subsection 37(3).

What a lender may ask you for

BDC’s page on its business purchase loan lists what BDC asks applicants to be ready to provide: the transaction structure, such as an asset or share purchase, a letter of intent and expected closing date, the business’s financial statements or income tax returns, and your recent Notices of Assessment. BDC says a financing structure may combine your own investment, a business loan and seller financing, and that it assesses the complete structure when reviewing a request. That list is BDC’s own. Other lenders may ask for different items, so confirm the list with yours.

Why it does not replace your own review

BDC describes due diligence as giving you crucial information on a target’s finances, prospects and legal issues, and calls a thorough review of them critical. A lender’s approval answers whether it will lend, not whether the business is what the seller says or whether the price and terms suit you. Treat approval as a separate result from your diligence, and see what to check before buying a business for your own list.

Where the two reviews meet

Check whether any of your lender’s conditions touch matters your own diligence covers, such as the lease or the assets. Why a buyer’s lender cares about the lease term shows one such link. Ask your lawyer which lender conditions belong in the purchase agreement.