Whether you are buying or selling a business You will be involved in some level of due diligence. Essentially ‘due diligence’ is the process to investigate and review of the key elements of a business with a view the understanding and confirming a decision to buy the business at an agreed amount.
Due Diligence from a Seller’s Perspective
From a Seller’s perspective, it is important to ensure that the elements that make up a business can be easily investigated by a prospective purchaser. Those elements must make up the compelling basis for the price at which the business is to be sold.
With this in mind a Seller must ensure that all of its ‘ducks line up’. That is that the key elements of the business support the business case for a buyer to want to buy your business at the price that you want to sell the business.
To do that, the Seller should start preparing the business for sale well before placing the business on the market. This preparation process is focussed on having the records and narrative about the business right, ready and available to any future prospective purchaser.
For example, are the financial records up to date? Have the financial records (including profit and loss statement) been accurately prepared to reflect the performance of the business. Any Purchaser analysing financial accounts will adjust the accounts for abnormal expenses and add back those expense lines that are not recorded. A prime example of which is the add back of the Seller’s wages (if not recorded or only notionally recorded).
In later articles, we will set out some of the matters that a Seller needs to specially consider as part of its due diligence approach.
Due Diligence from a Buyers Perspective
From a Buyer’s perspective, due diligence should be treated as a fundamental part of the buying process. The due diligence process is performed to confirm facts or details of a matter under consideration as part of the decision to buy and the price the Buyer is prepared to pay for the business.
That due diligence needs to take different facets of the business purchase including an examination of financial records, review of legal structures and issues, and an assessment of the assets and worth of the business. In essence, the Buyer is undertaking a risk assessment. That is, the ‘risk’ that the acquisition of the business is right for them, is likely to continue to be successful and return a reasonable profit return for the risk involved and that the price paid for the business is reasonable.
That process should be undertaken in conjunction with the Buyers team (accountant and lawyer) and should be focussed in key elements of the business acquisition.
From a lawyers perspective, we review the potential legal risks by collecting and assessing the key data and material so as gain insight on the business and its legitimacy and viability. For example, if a Buyer is acquiring a business operating from leased premises, due diligence would have to include the following:
Review and assessment of each property operated or maintained by the Seller;
Review of the lease arrangement with respect to each site including review of issues such as length of tenure, rent, further rent increase, s outgoing payments, make good, refurbishment obligations and issues around whether the lease can be bought to an early end (such as a demolition clause).
The approvals required to operate the premises and if relevant to approvals for the fit out and structure, especially if works have been undertaken by the Seller as part of establishing the business.
In our later articles, we will break down some of the key elements that a Buyer should consider as part of their due diligence process when buying a business.
Due diligence is an essential part of the process for any business sale. The more thorough and better it is done the greater the chance that potential down sides and risks can be identified earlier. By clarifying and dealing with the risks of a sale or purchase, it is more likely that a successful sale and purchase transaction will occur.
If you would like to discuss a Business Sale & Purchase or require more information please contact our team.
Written by Cameron Spanner.