Who pays for due diligence in a business purchase?

Who pays due diligence fees in a business purchase is a point to negotiate. The Business Development Bank of Canada (BDC) writes its buying guidance for the buyer, and in it the buyer is the one who involves experts. What you can control is when the question is settled: before you hire anyone, and ideally in the letter of intent.

The buyer’s own team

BDC says it is important to involve a team of qualified experts to help with due diligence. An accountant can help analyze the company’s financial records, and a lawyer can help with the letter of intent, draft the purchase agreement and conduct legal due diligence. In BDC’s description these advisers help the buyer, so ask who will pay each of them before work starts.

Settle the terms with each adviser

BDC advises that if you hire external experts, you establish clear terms about retainers and fees, conditions of success, confidentiality and conflicts of interest. Ask each adviser for a written fee arrangement and a scope. Ask what happens to the bill if you walk away partway through, because a diligence review can end without a purchase.

What the letter of intent can say

BDC lists, among the clauses a letter of intent may include, the distribution and responsibility for costs inherent to the proposed transaction, whether closed or not. So a buyer can ask for cost-sharing, or a reimbursement if the seller backs out, to be written down before diligence begins. BDC says a letter of intent is not intended to be fully binding unless that is expressly stipulated, so whether it binds the parties on that point depends on how it is worded. Ask your lawyer how the clause reads.

The seller prepares too

BDC also tells sellers to spend time with their own accountant and lawyer so records are clean, up to date, and properly signed and completed before the sale process starts. That work is the seller’s own preparation. If the business is a franchise, ask whether the franchise agreement sets a fee for approving the transfer, and see what a franchise transfer fee is.