If you are considering buying a business, there are a number of steps you should take before making a commitment, including conducting a comprehensive due diligence.
Generally, due diligence enquiries into a target business should have two main goals; namely to determine:
- the true value of the business; and
- any risks and whether they can be mitigated.
First and foremost, you should ensure you understand the structure of the proposed transaction. For example:
- Are you buying a business, shares in a company or units in a trust?
- Would an assets sale and purchase be more appropriate?
Each transactional structure poses its own risks and will impact the direction of the due diligence.
Further key questions to consider include:
- What are the material assets of the business? Does the business own freehold property? Are the assets leased or encumbered?
- Are the business premises leased? Can the lease be transferred? Are there any option terms? Will the business be forced to relocate?
- What arrangements exist with employees? Will employees be transferred or terminated? What about benefits and entitlements?
- Who are the competitors, customers and suppliers? Are there any material contracts without which the business would not survive? Will customers and/or suppliers stay with the business after a change in ownership?
- What are the tax and stamp duty implications of the transaction?
Along with a thorough financial due diligence and gaining an understanding of the industry, considering these issues will help determine whether you are buying the business for a fair price and allow you to implement strategies to promote the business. If particular risks are encountered, as is often the case, these should be specifically dealt with in the sale agreement; for example, by including conditions precedent or vendor warranties.
We have experience supporting buyers through all stages of transactions, including conducting a detailed or high level due diligence, negotiation of sale terms and ensuring a smooth transition.