When does due diligence start when buying a business?

BDC lays the process out in order: identify the target company, sign a letter of intent (LOI) and a confidentiality agreement, then carry out due diligence before negotiating the purchase agreement. The useful question is which checks belong to which stage.

Light checks before an offer

Public sources can answer some questions before any offer. The Canadian Intellectual Property Office, for example, says information about existing patents, industrial designs and trademarks is available in public databases. BDC adds that the buyer’s research before issuing the LOI may identify areas to focus on during due diligence. BDC calls the confidentiality agreement essential for the buyer to get the information needed to write an LOI, make an offer or withdraw interest.

Formal diligence after the LOI

BDC says that once the main transaction parameters are listed in the letter of intent, it is time to proceed with thorough due diligence. Its due diligence article says the LOI also gives the buyer access to the premises, records and, in some cases, key suppliers, customers and employees. BDC’s letter of intent article notes the LOI is not intended to be fully binding unless otherwise expressly stipulated, and that, where so provided, it will create binding obligations, particularly on confidentiality and exclusivity.

What to check in your LOI

• Whether it says when the review begins, such as on signing or when the seller delivers listed records.
• What the seller must provide, and by when.
• How long exclusivity runs and whether it starts on signing.
• Which parts bind the parties, such as confidentiality.

A lawyer can tell you what your wording means. For length, see how long due diligence takes, and for the weeks that follow, see what happens between the LOI and closing.