Before you commit to acquiring a business an important preliminary step is to undertake a thorough due diligence.
An effective due diligence process will involve an investigation or audit of matters relevant to the acquisition of the Business in addition to factors related to current operational needs and anticipated future business requirements.
Usually the Seller will not disclose confidential information about the Business until you have entered into either:
- a Contract of Business Sale;
- Non-Disclosure Deed or Confidentiality Deed;
- Heads of Agreement; or
- some other similar document.
The period for due diligence will vary depending on the nature of the business being acquired. You should allow sufficient time so that all necessary enquiries can be undertaken.
The due diligence enquiries to be undertaken will also vary depending on the nature of the business. Examples of enquiries may include the following:
History of Business –
- How long has it been in operation?
- Does the Business have any previous owners (apart from the Seller)?
- Are there any key customers ?
- Why is the Business being sold ?
- Does the Business have a Business Name ?
- If so, has the name been properly registered ?
- The success or failure of a small business is dependant to a large extent on its financial capacity. Accordingly, the due diligence process must include a review of the Business's sales performance and financial data;
- Ideally you should obtain copies of the following documents for the previous 3 financial years:
- Profit & Loss Statements;
- Balance Sheets;
- Cash Flow Statements;
- Annual Statements.
- If these statements have not previously been audited, you should consider engaging an accountant to undertake an audit to verify the data in the statements against other Business records, such as:
- Sales records;
- Bank statements;
- Tax Returns;
- BAS Statements;
- Loan documents, etc.
- The financial data needs to be adequate enough to allow you to project short term cash flow and profitability and to assist you to ascertain financial viability of the business.
- When acquiring a business it is important to know it’s true value;
- There are a number of different valuation methods. The two most common valuation methods are:
- Calculating a business's net worth (i.e. assets minus liabilities); or
- Valuing based on the business's income or profits and the expected return on investment (ROI).
- Professional advice from an accountant or valuer should be obtained.
- Obtain a list of all assets forming the Business;
- Carry out an inspection of the assets to confirm they do exist and are in good working order;
- Check the assets are not encumbered by third party interests.
- Check if any of the stated assets are subject to leases or hire purchase agreements;
- If so, confirm the terms & conditions and assess the benefits of taking over the obligations.
- Obtain a list of the stock-in-trade;
- Carry out an inspection to ensure the stock-in-trade is of merchantable quality;
- Undertake a stock valuation or stocktake to assess the amount of stock on hand.
- Obtain copies of current insurance policies and check assets are insured.
- Assess intellectual property (IP) of the Business;
- Is the IP properly protected through licenses, patents, trademarks and registrations ?
- Confirm that the IP rights will be transferred or granted to you at settlement of the sale.
- Obtain a copy of the customer data base;
- Check sales contracts to see if customers are locked in and if future business is guaranteed;
- Are major contracts about to expire ?
- What are the sales patterns year-by-year and month-by-month? Is the pattern seasonal or related to some business cycle ?
- Is the customer base well-developed ?
- Obtain details of suppliers;
- Ascertain whether you want to continue dealing with them (and vice versa);
- Are there existing Supplier Contracts ?
- What are the terms of trade ?
- Obtain a copy of the licenses and permits relevant to the Business;
- Check that they are current;
- Verify that no non-disclosed licenses and permits also apply to the Business.
- Check if the Business owner is involved in any current or pending legal proceedings which could impact on the business;
- Has the Business owner complied with relevant laws, such as, environmental and workplace health and safety laws?
- Obtain a copy of the current Lease;
- Check the terms and conditions of the Lease;
- Is the permitted use under the Lease approved by the appropriate regulatory authority?
- Is the Premises in good order and condition?
- Can the business be easily relocated at the end of the Lease?
You need to evaluate other factors such as:
- At what stage is the Business in terms of the business life cycle?
- Who and where are the competitors of the Business and does the Business have a competitive advantage?
- Are sound business systems and procedures in place and documented?
- What marketing and advertising is currently in place?
- What is the current and foreseeable economic environment in which the business will operate?
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The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.
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