Tax Question:
I am considering purchasing shares of a business, what kind of investigative steps should I take?
Facts:
If you are considering purchasing a business, there are due diligence procedures you should take to ensure you are making an educated decision.
Discussion:
Buying shares in a private corporation is a big decision and you should ensure you are comfortable and aware of what you may be getting into. When buying shares in a private corporation, you are taking on all the history of the company, both good and bad. Therefore, you want to make sure there are no surprises. Due diligence procedures can be performed to help ensure that you understand what you are buying and that you have identified any potential risks.
You may want to perform the following due diligence procedures:
- Perform Google searches on the company and management.
- Physically view the premises and it’s assets.
- Attend an inventory count.
- Ask if any lawsuits have been filed-talk to the corporate lawyer.
- Talk to customers to get an impression of customer loyalty and areas of concern.
- Talk to suppliers to understand the company-supplier relationship.
- Talk to employees to get an impression of employee satisfaction, loyalty and skill set.
- Hire a valuator to ensure you don’t pay more than the company is worth.
If you have performed the above procedures and are still interested in pursuing the acquisition, you should hire an accountant to examine tax returns, financial statements and accounting records of the company. The accountant may be able to identify if there is anything unusual, missed or incorrectly reported. This will depend on how much access the accountant has to the business records. You as the new owner would be liable for the taxes owing if Canada Revenue Agency (CRA) were to audit or reassess the previously filed returns. Contracts should also be reviewed to help understand the future commitments and liabilities of the company.
Recommendation:
If you are considering purchasing a business and would like to discuss due diligence procedures to help ensure you are making an educated decision, please contact Gilmour Knotts Chartered Accountants.