Due Diligence Steps You Should Consider Before Purchasing a Business

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.

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Documentation

From the outset, you should be requesting the following documentation from the vendor which can also be reviewed by your professional advisors:

1. Profit and loss statements;
2. Balance sheets;
3. Tax returns;
4. Schedule of assets including intellectual property and price apportionment;
5. Inventory of equipment;
6. Depreciation schedule;
7. List of stock in trade;
8. List of work in progress;
9. Any licences affecting the business;
10. List of employees and their accrued entitlements;
11. Notices affecting the business including from council and government bodies;
12. Orders affecting the business including from courts and tribunals;
13. Any potential or current proceedings impacting the business;
14. Any ongoing / continuing agreements the business has whether they be with customers, suppliers or contractors; and
15. 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:

1. An ASIC search;
2. A patent search through IP Australia;
3. A trade mark search through IP Australia;
4. A title search on any premises owned or leased;
5. A search on the Personal Property Securities Register;
6. 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;
7. A search for the social media accounts owned by the vendor (if any);
8. Inspecting the premises; and
9. 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.

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