Due diligence by a prospective buyer of a business could prevent serious problems in the future, Windsor corporate lawyer Laura Stairs tells AdvocateDaily.com.

Stairs, an associate with Shibley Righton LLP, advises clients that the first step in avoiding pitfalls is to get a copy of the corporate record of the target firm.

"We want to ensure the person the client is dealing with has the authority to make agreements and decisions with respect to the corporation," she says.

"The next thing we look at are the financial statements," Stairs says. "We want to know if this business is profitable, look at the liabilities and debts that are out there and determine whether it's worth investing in."

She says she encourages clients not to enter into any share purchase agreement before having an opportunity to review these types of documents.

"Instead, we often advise them to enter into a Letter of Intent," Stairs says. "This is a document that sets out the general terms, but it is not binding on the parties.

"You want to make sure that it specifically says it is a non-binding agreement, but it allows the potential buyer to undertake a due diligence review," she says. "As a seller, you would want to include a provision in the Letter of Intent that is binding, confirming that any information shared with the potential purchaser is confidential and won't be distributed or used outside the document's terms."

Stairs says she also urges buyers to investigate those employed by the business to understand how long they have worked there because the common law protects employees when they are being terminated.

"If you buy a business through a share purchase agreement, you are responsible for the employees unless you come to some agreement that the previous owner terminates them," she says. "The reason this becomes an issue is that the longer the term of service an employee has, the more notice and severance pay they're entitled to on their termination."

If a buyer agrees to accept the employees, they become responsible for them, including any entitlements and their seniority within the company, Stair says.

"That's why it’s important to do your due diligence up front and understand what the obligations might be, so you can structure the agreement to protect yourself as much as possible," she says.

Stairs says if the labour costs are beyond expectations, it may be possible that before purchasing the business, the vendor is required to terminate all the employees and assume responsibility for all the associated costs.

Another issue a buyer needs to ensure is dealt with involves regulatory bodies that oversee various businesses and trades, she says.

"There are some businesses that require regulatory licences to operate," Stairs says. "You need to ensure before you buy the operation that you will be entitled to continue on with that licence or that your application for a new licence will be granted,” she says.

Some regulatory bodies will work with the buyer to determine whether the new owner would be able to continue the business, Stairs says.

"It depends on the ministry or body that oversees the regulation of the business," Stairs says, adding the firm should investigate what the ministry requires and "quite possibly you would be interacting directly with the ministry as a buyer."