Introduction
Purchasing a business is an exciting opportunity, but it is important that as a purchaser you consider the significant risks and responsibilities involved. To ensure you are fully aware of the circumstances surrounding the business you are purchasing and to avoid any surprises after the purchase is complete, it is essential that you conduct due diligence.
Due diligence includes inspecting financial records and confirming legal compliance to help you assess the business’ health, stability and value, to safeguard your investment. It is best to conduct due diligence alongside your professional (including legal and financial) advisors.
This article outlines the key areas and/or items that purchasers should look at when conducting due diligence to ensure that you can make an informed decision about the purchase.
Please note the below is not an exhaustive list of what should be inspected when conducting due diligence and what must be inspected may vary depending on the nature and status of the business.
Download our Free Due Diligence Checklist here.
Key article takeaways
- Due diligence helps buyers understand the legal, financial, operational and commercial risks of a business before completing the purchase.
- Buyers should review financial records, contracts, employees, leases, licences, assets, IP, disputes and regulatory issues.
- Searches through ASIC, IP Australia, the PPSR and property/title records can help verify important information.
- Legal and financial advisers can help identify hidden risks, review documents and negotiate appropriate protections before settlement.
- LawBase’s free Due Diligence Checklist can help buyers understand the common documents and issues to review before purchasing a business.
Documentation
From the outset, you should be requesting the following documentation from the vendor which can also be reviewed by your professional advisors:
- Profit and loss statements;
- Balance sheets;
- Tax returns;
- Schedule of assets including intellectual property and price apportionment;
- Inventory of equipment;
- Depreciation schedule;
- List of stock in trade;
- List of work in progress;
- Any licences affecting the business;
- List of employees and their accrued entitlements;
- Notices affecting the business including from council and government bodies;
- Orders affecting the business including from courts and tribunals;
- Any potential or current proceedings impacting the business;
- Any ongoing / continuing agreements the business has whether they be with customers, suppliers or contractors; and
- Any lease documentation.
Searches and Enquiries
In addition to requesting and reviewing documentation provided by the vendor, you should also conduct your own enquiries into the business, including by conducting your own searches. Such searches that you should conduct include:
- An ASIC search;
- A patent search through IP Australia;
- A trade mark search through IP Australia;
- A title search on any premises owned or leased;
- A search on the Personal Property Securities Register;
- A search of the business name. This search will include confirming whether the business name is registered but also whether the vendor has registered the business name as a domain name for the business;
- A search for the social media accounts owned by the vendor (if any);
- Inspecting the premises; and
- Inspecting the equipment included in the sale.
The Role of Professional Advisors
Professional advisors can assist you in reviewing the above and can provide expert guidance, analysis and support to ensure that you make informed decisions about the business. Specifically, professional advisors can use their experience and knowledge to help you identify risks, evaluate opportunities and navigate complex legal, financial, and operational issues that may arise.
Conclusion
Whilst the above is not an exhaustive list of what should be inspected during the due diligence period, it is a starting point to demonstrate the types of considerations you must make when purchasing a business. Professional advisors can greatly assist you during the due diligence process with their insights likely to help you uncover hidden risks, validate the business’ value and help you navigate complex legal and financial issues. By conducting due diligence with the right team of professional advisors, you can be confident that you are making an informed decision about your purchase.
The information in this article is for general purposes only and you should obtain professional advice relevant to your specific circumstances.
Buying a Business? Review the Risks Before You Commit
Due diligence helps you understand what you are buying before you sign or settle. LawBase can assist with reviewing contracts, leases, employees, licences, intellectual property, PPSR issues and other legal risks that may affect the purchase.
Download our free Due Diligence Checklist or speak with a LawBase business purchase lawyer before you commit.
Additional resources
Due diligence is the process of investigating a business before deciding whether to proceed with the purchase.
It usually involves reviewing the business’s financial, legal, operational and commercial position so the buyer can understand what they are buying and identify any risks before settlement.
This may include reviewing financial records, contracts, employees, leases, licences, intellectual property, assets, stock, disputes and compliance issues.
Schedule a Free CallDue diligence is important because it helps buyers identify risks before they commit to the purchase.
Without proper due diligence, a buyer may later discover issues such as hidden liabilities, inaccurate financial information, unfavourable contracts, employee entitlement problems, lease issues, IP ownership concerns or assets subject to security interests.
Identifying these issues early may allow the buyer to renegotiate terms, request additional protections, delay settlement or decide not to proceed.
The documents required will depend on the business, but buyers commonly request financial statements, tax returns, asset schedules, stock lists, employee records, contracts, licences, lease documents, notices, orders, dispute records and details of any ongoing customer, supplier or contractor arrangements.
These documents should usually be reviewed by legal and financial advisers before the buyer commits to the purchase.
LawBase’s Due Diligence Checklist can help buyers understand the types of documents commonly reviewed before purchasing a business.
Common searches may include ASIC searches, business name searches, trade mark searches, patent searches, PPSR searches, title searches and searches relating to licences, permits or regulatory compliance.
These searches can help verify ownership, identify registered interests, check IP protection and confirm whether there are issues that may affect the business or assets being purchased.
The right searches will depend on the business, its assets and the structure of the transaction.
A PPSR search can help identify whether security interests are registered against personal property being sold with the business, such as equipment, vehicles, stock or other assets.
This is important because a buyer may think they are acquiring assets free from debt or third-party claims, when in fact another party may have a registered security interest over them.
Buyers should consider PPSR searches as part of their due diligence and ensure any relevant security interests are addressed before settlement.
Buyers should review employee lists, employment contracts, pay rates, accrued entitlements, awards, leave balances and any arrangements affecting whether employees will transfer with the business.
Employee entitlements can be a significant issue in a business purchase. Buyers should understand whether they are taking on employees, whether service will be recognised and whether any liabilities are being assumed.
This should be reviewed before signing or completing the business purchase.
Yes. A lawyer can help review legal documents, identify risks and advise on issues that may need to be addressed in the contract of sale.
This may include contracts, lease documents, employee arrangements, licences, intellectual property, PPSR issues, disputes, warranties, indemnities and settlement conditions.
Legal advice during due diligence can help buyers understand risk before they commit to the purchase.
Yes. LawBase can assist buyers with legal due diligence before purchasing a business.
This may include reviewing contracts, leases, employee arrangements, licences, intellectual property, PPSR issues, legal compliance and the business sale agreement.
LawBase’s free Due Diligence Checklist can also help buyers understand the common documents and issues to review before deciding whether to proceed.
Schedule a Free CallRelated Resources
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