It is important to ensure due diligence is carried out before purchasing a business so you know exactly what it is you are buying. This helps with eliminating any risks that maybe associated with the business.
With the due diligence process it is best to look at a number of different aspects of the business including how it is operated, financial performance, legal and tax compliance, customer contracts, intellectual property, assets and other details. This process is normally carried out once you have made a deal with the seller but before you have signed any contracts.
Be mindful that all this information is highly confidential and the seller may want you to sign a “non-disclosure” agreement before they provide you access to this information.
Legal and Tax
There are a number of legal and tax questions you will need to consider when buying a business. Areas you may need assistance with include:
- Terms and conditions of the agreement and your rights and obligations
- Property search regarding health, water and sewerage
- Pending legal proceedings against the business or seller
- Best ways to handle the finances, purchase and business structure
- Capital gains tax
- Stamp duty implications
- GST or other stamp duty implications
- How to value your assets for best tax advantage
Finance and Sale
It is important to review the business’s sales performance and financial data so best to consult a professional to help you. Below are a few examples of what they could assist you with.
- Financial records for the past 3 years, including balance sheets, profit and loss statements, tax returns, purchases and sales records and bank statements
- Assess whether there is potential growth and if the business is profitable
- Reliability of Sales
- Seasonal patterns
- Are more resources required?
- What are the salespeople like in regards to the success of the business?
- What is unique about the product or service?
Business Operations and Industry
By carrying out a detailed review of the business’s operations and industry environment can help to determine the seller’s reasons behind selling the business. Here are some items you might want to assess:
- Is the business suitable for what you want to do/achieve?
- Restrictions such as franchise as to how the business must operate
- Permission for the business to actually be running the way it currently is
- Procedure manuals
- Business Licenses / equipment licenses etc
- Reason for the sale
- Will there be training from the seller after you buy the business?
- Is there a trial period to work in the business before buying?
- Is the business in a high growth industry?
- Is their possibilities that competition could increase and impact on the business further?
- Should the same suppliers be used?
- What are the supplier’s business credit ratings?
- Are the suppliers in any type of contract with the business?
- Is the location of the business good or poor?
- Are there any changes to the local area that may affect the business?
- Is there a lease in place and can you continue under that same lease or does a new one need to be drawn up?
- What are the terms & conditions regarding the lease agreement?
- Who is the landlord and what are their rights and responsibilities?
- Are all staff on contracts? Who is permanent/casual etc?
- What are the staff wages and salary packages and are what award are they under?
- Do staffs require any specific licences/ ongoing training?
You should assess the business you are going to buy and ensure you know what the tangible and intangible assets are. It is a good idea to know exactly what you are buying with the business and what may not be included in the sale.
- Is there a checklist of assets and have you check them out?
- Book value, market value and replacement value of the assets.
- If inventory is involved, what inventory is included in the sale?
- Intangible items can include mailing lists, business name, database, leases.
- Find out what the turnover of stock is.
- Has the stock been correctly valued?
- Is it in good shape? Does it need repairing? Is it a hazard?
- Is it expensive to repair? Are parts easily available?
- Is any equipment leased? What are the terms and conditions?
- What happens when the lease for the equipment expires?
Expenses and Debts
To ensure you are getting the most for your money, make sure you completely understand what the ongoing costs are to the business and if the business has any debts. If you have a comprehensive understanding before going into the business you shouldn’t receive any surprises once you have purchased it. Some areas to look out for or to ask yourself include:
- Are you aware of all the expenses? Will you incur all of these same expenses when you purchase the business?
- Could there be some expenses missing?
- Are the expenses being paid through another business?
- What expenses do other similar businesses have?
- Are there body corporate expenses?
- Advertising agreements that need to be honoured?
- Are there any debts associated with the assets? What are the repayment terms?
- Will the cash flow of the business cover any debts?
(Source: Queensland Government, Business & Industry Portal, Revised 16th may 2014, http://www.business.qld.gov.au/business/starting/business-startup-options/due-diligence-checklist/)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
If you are thinking of buying or selling a business, contact our team today and they will be able to assist you with all aspects 1300 STOLAW or http://www.stolaw.com.au/contact