Corporate & Commercial

Due Diligence Checklist for Buying a Business in Pakistan

The purpose of diligence is not to produce a report. It is to answer three questions: should this deal proceed, at what price, and what protection does the buyer need in the documents. Every line of the checklist below exists because of a deal that went wrong without it.

Share purchase or asset purchase — decide early

This choice shapes everything that follows. In a share purchase, the buyer acquires the company as it stands — including every liability, known and unknown, disclosed and undisclosed. In an asset purchase, the buyer takes identified assets and typically leaves historic liabilities behind, though at the cost of having to novate contracts, re-obtain licences and re-employ staff.

Where diligence reveals significant historic tax or litigation exposure, that finding often converts a share deal into an asset deal. Deciding the structure before diligence is done, and refusing to revisit it afterwards, defeats the purpose of doing diligence at all.

Corporate and constitutional documents

• Certificate of incorporation, memorandum and articles of association
• SECP filing history — annual returns, Form A and Form 29, and whether filings are current. Persistent default indicates how the company is run and carries its own penalties
• Statutory registers: members, directors, charges and mortgages
• Board and general meeting minutes, and evidence that material decisions were properly authorised
• The register of charges specifically — existing security over company assets is a common and unwelcome discovery late in a deal
• Any existing shareholders' agreement, which may contain pre-emption or consent rights that constrain the sale itself

Tax: the largest hidden exposure

In a share purchase, historic tax liability travels with the company. Verify:

• Income tax returns and assessment orders for open years, and whether any year remains open to amendment
• Pending FBR notices — a live show-cause notice, audit selection, or unanswered demand is a quantifiable liability, not a formality
• Sales tax registration and filing status
• Withholding tax compliance — failure to deduct or deposit is a frequent and material exposure that does not appear in the financial statements
• Any pending appeals before the Commissioner (Appeals) or the Appellate Tribunal, and the amounts at stake

Title to property and assets

Where real property is involved, ordinary title verification applies in full: chain of title, mutation entries and revenue records, encumbrances, and consistency between what the seller shows and what the record holds. Verify the property is actually held by the company rather than personally by a shareholder — a surprisingly common discovery, and one that changes the deal.

For plant, machinery and vehicles, confirm ownership as against lease or hire-purchase, and check for existing charges.

Employment and labour

• Employment contracts, particularly for senior staff, and any change-of-control provisions
• Accrued liabilities — gratuity, provident fund, leave encashment. These are often unrecorded or under-provided
• EOBI and social security registration and payment status
• Pending labour disputes or industrial relations issues

Litigation and contingent liabilities

Obtain a schedule of all pending litigation with an assessment of exposure, and verify it independently rather than relying on management's list — cases the seller regards as unimportant have a way of not appearing. Include guarantees given by the company, indemnities, and any regulatory proceedings.

Contracts, licences and IP

• Material customer and supplier contracts, and whether any terminate or require consent on change of control
• Sector-specific licences and regulatory approvals — and whether they survive the transaction. In an asset purchase they frequently do not
• Trademark registrations, and whether they are registered in the company's name rather than a founder's. Confirm renewal status
• Assignment of copyright in software or materials created by employees or contractors
• Domain names and social media accounts — routinely overlooked, and routinely held personally

Turning findings into deal terms

Diligence findings should translate directly into the sale and purchase agreement:

• Price adjustment where a liability is quantifiable
• Warranties from the seller as to the state of affairs, with a disclosure letter carving out what has been disclosed
• Specific indemnities for identified risks — a pending tax assessment or known litigation should be indemnified specifically rather than left to a general warranty
• Retention or escrow of part of the price against contingent exposures
• Conditions precedent requiring matters to be regularised before completion

A finding that is identified but not reflected in the documents has cost the buyer the fee and given nothing back. That translation step is where diligence either earns its value or does not.

This article is general information about Pakistani law and procedure, not legal advice for any specific matter. If this touches on something you're currently facing, get in touch and we'll advise on your facts directly.