The short answer: Due diligence is the stage where a buyer checks that your business is what you said it is. It is also where many deals shrink or collapse. The good news is that most problems are predictable. If you assemble the right documents before a buyer asks, diligence becomes a formality instead of an interrogation.
What due diligence is
After you sign a letter of intent, the buyer reviews your company in detail, usually through a secure online data room. Buyers commonly expect three to five years of audited or reviewed financial statements, revenue broken down by customer and product line, material contracts and leases, employee data, and intellectual property documentation. The process typically takes a couple of months, so delays on your side cost momentum.
The checklist
Use this as a starting point. Your advisor and lawyer will adapt it to your industry.
Financial
- Three to five years of financial statements, preferably reviewed or audited
- Monthly management accounts for the current year
- Revenue by customer, product and period
- A reconciliation of reported profit to adjusted earnings, with support for each adjustment
- Tax returns and evidence that filings, payroll remittances and sales taxes are current
- Accounts receivable and payable aging, and a list of debts and liens
Customers and revenue
- Top customers and the share of revenue each represents
- Customer contracts, renewal dates and any termination or change-of-control clauses
- Recurring versus one-time revenue
- Customer churn and retention figures
Legal and corporate
- Articles, bylaws, minute books and a current share register
- Shareholder agreements and any options or convertible securities
- Material contracts, leases and loan agreements
- Licences, permits and regulatory filings
- Any current or threatened litigation or disputes
People
- An employee list with roles, pay, benefits and start dates
- Employment and contractor agreements, including non-competes and confidentiality terms
- Key-person dependencies and who would stay after a sale
- Any outstanding bonuses, vacation pay, severance or employment claims
Intellectual property and technology
- Trademarks, patents and domain names, with proof of ownership
- Written assignments from every employee and contractor who created IP
- A list of software, open-source licences and critical third-party systems
- Data privacy practices and any security incidents
Operations
- Key supplier agreements and any single-supplier risks
- Insurance policies and claims history
- Equipment and asset lists
- Environmental or health-and-safety issues, where relevant
The red flags that cost sellers money
Advisors repeatedly cite the same problems when deals fall apart: undisclosed liabilities that surface after the letter of intent, financial discrepancies, customer concentration of 15% to 20% of revenue or more in one account, unresolved legal issues, and a business that depends on its founder. Buyers react to surprises more than to bad news. A weakness you disclosed early is a negotiating point. The same weakness discovered late is a reason to cut the price or walk away.
How to prepare
- Do a sell-side review first. Have your advisor or accountant run diligence on your own company before any buyer does. Fix what you can and prepare explanations for what you cannot.
- Build the data room early. Organize documents in folders that follow the checklist above, with clear names and dates.
- Make the numbers reconcile. Every figure in your information memorandum should tie back to your financial statements.
- Disclose, do not hide. Surprises damage trust. Raise known issues yourself and bring a plan.
- Respond quickly. Name one person to manage requests so answers arrive in days, not weeks.
- Keep running the business. Do not let performance slip while you focus on the deal. A weak quarter during diligence invites a lower offer.
The practical takeaway
Due diligence rewards the prepared. Owners who start gathering these documents a year ahead sell with confidence, while those who start after the letter of intent scramble. See how to sell a business in Canada for the full process, and how much your business is worth for how diligence findings can affect price.
Want to talk through readiness?
Launch Capital is a Toronto venture capital firm and family office focused on technology and services businesses. If you run a Canadian technology or services business and want to talk through readiness, contact us.
This article is general information, not legal, tax or financial advice. Your lawyer and advisor should tailor the checklist to your transaction.
