Due diligence is one of, if not the most important pre-requisite to buying a business. It can however also be one of the most time consuming and can end up dragging the sale on, as each party must request and collate information. Below, we set out four tips that in our experience help speed up the process. We follow this up with a summary of the type of information that is required for a business sale.
1. Collect the Information From the Onset
All lawyers will more or less ask for the same information irrespective of what kind of business is being sold. This means that the information that a buyer needs to provide to the seller can be pre-collected as part of the sale process. In short, the vendor can collect the required information while looking for a buyer, and/or during the contract drafting phase. This will ensure that once the contracts are actually signed and exchanged, the due diligence process can start immediately rather than having to wait to collect the required information from each party.
2. Include the Information as Part of the Contract
If the vendor the adds the information gathered to the contract as part of the initial offer, then the purchaser can already have some idea of the business and its performance before they sign the contract. This way, when it comes to conducting the due diligence, the purchaser will only need to request information that is very specific to that particular business being sold rather than the general due diligence information that the vendor has already provided.
3. Make Sure the Contract Includes all Relevant Contact Details
It is very common for lawyers to spend time requesting contact details for 3rd parties. For example, contact details for accountants, lessors and sometimes, franchisors. By ensuring that the contract includes this information at the outset such as names, emails and contact numbers, this can help cut down the time spent in conducting due diligence.
4. Include a Completion Date
Very often, it is in the purchaser’s interests to set a completion date subject to the completion of due diligence and/or other prerequisites (for example, transferring the lease). By expressly stating a completion date, parties know when to expect the sale to be completed, and encourages all parties to move towards achieving it.
What Information is Usually Required for Due Diligence
Irrespective of the type of business the vendor is selling, almost all lawyers will ask for the following information.
Information Required by the Purchaser
- A copy of the lease – this item is self-explanatory. If there is a lease, the purchaser’s lawyer will require a copy to review it and ensure the terms are satisfactory for their client.
- A copy of any development approvals (certificates) and other council approvals – this item follows on from the first and is required to ensure that the vendor has complied with any development approvals and other council requirements. It is also required to make sure that if the vendor, for example, owns a coffee shop and has chairs and tables on the pathway, that it has the proper council approvals to do this. Note that the usual requisitions process can also address this.
- A copy of employee agreements – the purchaser will need to review any employment agreements to know what entitlements existing employees have (especially if they plan on keeping them on) and if the employee decides to leave, that there are proper restraints in place.
- A copy of 3rd party agreements – very often a business’ value comes from existing agreements between the vendor and a 3rd party. The purchaser’s lawyer will want to make sure that any existing agreements between the vendor and the 3rd party can be properly assigned/ transferred so that there is ongoing value associated with them.
- Copies of the business’s financial records – generally, the purchaser will require 2 to 3 years’ worth of financial records for review. Although the purchaser’s accountant typically reviews these documents rather than a lawyer, it is still the lawyer’s obligation to request it.
- Copies of documents evidencing ownership of assets (plant and equipment) – again this will be required to ensure that the value of the business is properly accounted for. It will also allow the purchaser to make sure that any assets which the vendor is leasing can be assigned/transferred. Here the vendor can also include search results for PPSR securities.
Information Required by the Vendor
- Deed of restraint – although most contracts will already include provisions for restraint on the vendor competing, this may not apply where the vendor is a corporate entity. In these cases, a deed of restraint is required for the vendor’s directors and/or key personnel. The vendor’s lawyer will want to review this to ensure that it does not operate to prevent the vendor’s directors and/or key personnel from being able to earn a legitimate livelihood after selling the business.
Due diligence can slow down a sale of business, and extend the period between exchange and completion. By gathering all of the above information during the period when a vendor is locating a purchaser and/or contract drafting period, this can reduce the time required to complete due diligence, and speed up the sale process. Questions? Let us know.