BUYING A BUSINESS - IMPORTANCE OF DUE DILIGENCE
For most people, buying a company or business is a significant investment. If it goes well, it has the potential to make a positive impact on your personal and financial life. As with any purchase or investment, it is important to know what you are buying before you agree to buy it.
This can be done by undertaking a thorough due diligence enquiry prior to signing an agreement or before completion.
A purchaser shouldn’t rely on what they’ve been told about a business. They should make their own enquiries and objectively assess its potential. Vendors may also wish to undertake a limited form of due diligence when preparing a company or business for sale.
Due diligence can be completed before a contract is signed or as a condition in a contract to be satisfied prior to completion.
The following are examples of the matters to be investigated or reviewed as part of a due diligence review:
- Incorporation details (if purchasing a company), constitution and statutory records/registers, searches of any land being purchased and the PPSR where assets are being acquired
- Employee details, employment agreements and health and safety compliance
- Intellectual property, e.g. business names and trademarks, being acquired and relevant searches and licences
- Statements of financial performance and position to ensure they have been properly prepared in accordance with generally accepted practice and to verify figures and information stated in any term sheet or information memorandum
- The terms of any business contracts or leases to be taken over by a purchaser
- Compliance with any legislation, rules or regulations which relate to the operation of the company or business and insurance policies if relevant
- The age and condition of any assets or inventory being acquired by a purchaser
- The terms of any loans or debt facilities in relation to the company or business taken over by a purchaser; and
- The customer base for the business, its competitors and prospects for future growth and development.
This is by no means an exhaustive list and each due diligence investigation will vary depending on the type of business being purchased.
It is common for purchasers to instruct their lawyers and accountants to assist with due diligence. Contact the team at Blackwells for help with due diligence and other aspects of buying a business.