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Purchasing a Business – Due Diligence for your Purchase

When you get the opportunity to buy an existing business to take on as your own, the process can seem quite exciting, rapid, and also daunting.

Author: Clarissa Sempel

16 September 2021

Suddenly, you are looking at ways that you can make that business your own or seeing the potential you could bring.

However, before entering into any binding contracts, you should take the first step of undertaking due diligence.

The due diligence process is one where you, as a purchaser, will look at a number of different aspects of a business and ask questions to get a full understanding of:

  • how the business is conducted;
  • who are the customers?
  • Threats to the goodwill;
  • financially what is its turnover?;
  • what are the day to day costs of the business?
  • What is its real value? Am I paying a reasonable price or overs?
  • whether there are any risks that you should be aware of;
  • what kind of agreements are in place for the business (suppliers, landlord, customers);
  • and the various matter which may impact your decision.

Normally the vendor will require the purchaser to sign a non-disclosure agreement to protect the confidentiality of information accessed by the prospective purchaser during due diligence.  An NDA can also make the due diligence program fixed to an exclusive period and target buyer.   We regularly draft these documents to protect our clients.

During due diligence regime, you may discover, for example, that the turnover isn’t actually what the vendor said, there has been a decline in sales and why, the lease hasn’t got much time to run, a competitor is moving in up the road, equipment is not owned by the vendor, or that there are certain terms in contracts which will impact your ability to continue to operate the business in the same way.

Some (but not all) questions which may be asked include:

  1. How is the business currently structured? Is it a sole trader, partnership, company?
  2. Who are the owners of the business – including any shareholders if it is a company or beneficiaries of a trust?
  3. Are there any licenses, permits, or approvals the business requires?
  4. What is the cashflow for the business for the past three years?
  5. What assets and equipment are owing by the business?
  6. What assets or equipment is leased by the business?

Depending on the type of business and the complexity, you may be able to complete the due diligence yourself however we recommend using professionals such as your accountant to advise on key commercial issues. We can also refer you to competent professionals such as accountants, financial planners and brokers to seek advice on financial matters

The more complex the process, the more formal approach should be taken with your legal and accounting teams to support you.

At Access Law Group we are able to assist you with your purchase of a business from the very start (including the due diligence stage), and also an assessment of the documents once they are provided.

If you are interested in purchasing a business, please contact us on 02 4220-7100 or by email at lawyers@alg.com.au to arrange your free initial half-hour consultation.