Due diligence is the process by which you or your business lawyer can discover all the details of the business before you buy a business. It allows you to determine the business’ financial viability, identify any ongoing risks, and assess the business’ potential in the short and long term. A business lawyer and even a financial adviser should be engaged during this process to ensure you are getting good value for money on the purchase.
When a business lawyer assesses the value of a business, some aspects will undoubtedly be more valuable than others. Say, for example, you are operating a café and the coffee machine breaks down. Of course, you can replace the machine but you cannot as easily replace the coffee blend that the customers have come to love and cherish. In a similar sense, the skilled barista who has developed a great rapport with the clientele will be extremely valuable to the business, especially if you want to retain most of the customer base during the sale transition.
For this reason and others, your business lawyer needs to be sure that certain aspects of the business are in tact, so that you can be sure you are getting good value.
Getting value for money
A comprehensive assessment of the business, or investigation of its key elements, will expose any weaknesses in the financial position of the business. It is fairly standard for a business lawyer to draft the Sale of Business Contract so that it is “subject to due diligence”. This allows a period of time for the buyer to make all necessary enquiries and to walk away or engage in negotiations if certain aspects of the business are concerning.
You may find it difficult to inform yourself of every last detail of the business and its operations. For this reason, you may want to have your business lawyer investigate the most important aspects of the business. These include the following:
- Intellectual Property – The IP of a business is often one of the most valuable assets, as it encompasses the brand recognition and goodwill of the business. To assess the value of the IP, your business lawyer should investigate whether or not the seller of the business is in fact the true owner of the IP of the business, as well as whether these assets are transferable upon completion of the sale.
- Site, Lease – The region in which the business operates might be absolutely fundamental to the success of the business. In this case, the lease becomes equally important. Your business lawyer should answer the following questions:
– Is the lease suitable for the business? i.e. Can the business lawfully operate from the particular site?
– Is the term of the lease adequate for your purposes?
- Approvals, Licences and Permits – Depending on the particular industry your business falls into, there are certain local and state governments regulations that require businesses to obtain certain permits, approvals and licences to lawfully operate. As the buyer, you or your business lawyer must investigate which permits or licences the various government bodies require. Your business lawyer should find out whether these licences, permits and/or approval are transferable from the seller upon completion of the sale and whether you can apply to the relevant bodies for these licences.
- Customer base – Where is the bulk of the revenue coming from? This is critical information, as retaining those customers might be the difference between success and failure. Your business lawyer should evaluate the terms of the various Client Agreements to ensure all major clients are happy with their current agreements.
- Existing employees – Many businesses rely heavily on one or two of their key employees. If this is the case, your business lawyer should take steps to guarantee the transfer of these employees and assess whether their employment contracts will need to be reviewed. If this is not possible, the know-how of the key employees should be fully disclosed to you, the purchaser.
- Supply Contracts – In the same vein, supply contracts can be extremely valuable assets when buying a new business. It should be part your business lawyer’s due diligence investigations to enquire as to the transferability of these contracts upon sale of the business.
When all is said and done, and the due diligence process has been thoroughly conducted by your business lawyer, you should be satisfied about whether or not buying the business is a worthy investment. If after assessing the various aspects of the business, you or your business lawyer are not satisfied, you may terminate the agreement pursuant to the due diligence clause in your contract. If you believe that the price should be adjusted, you should have your business lawyer contact the seller’s lawyer/business broker to renegotiate the terms of the Sale of Business contract.