Part 1 – What are the key areas to review in a Due Diligence Process?

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Table of Contents

• Business operations and the industry
• Legal
• Conclusion

Firstly – congratulations on finding a business you’d like to purchase!

Now that you have found a business you’d like to buy, it’s time to focus on the less exciting stuff. The good news is that your lawyer, accountant and/or other financial advisers can help you make this process much easier and less painful.

Businesses, especially the larger ones, are complicated and before you pay a large amount of money to buy someone else’s business, it is important that you understand what exactly it is that you are buying.

The investigation into a business that you are purchasing is called the due diligence process. For more information about the due diligence process in general, see part 1 and part 2 of our 2 part article series on the due diligence process.

Business operations and the industry

Things that need to be considered in relation to the business operations and industry are:

• whether the type and size of the business are compatible with your personality, your experience and your available capital;
• whether the business has good policies in place;
• why the business is for sale;
• whether there will be any trial and/or training periods;
• what the future direction of the industry will be – whether it will expand or contract;
• what sort of competition is currently in the industry;
• what agreements the business currently has in place and whether those will be able to be maintained;
• the terms and conditions of the existing lease, if the business has a physical location;
• whether there are any expected developments in the area of the business that will affect sales;
• whether the seller is agreeable to having a restraint on starting a similar business nearby;
• how many staff are in the business;
• on what conditions are staff employed; and
• who is responsible for the payment of the accrued staff entitlements.

Legal

The main contract in the transaction is the sale of business agreement. You need to check that this agreement correctly identifies the assets you are purchasing and liabilities that you will be assuming, and sets out all the terms and conditions which have been discussed and agreed in principle.

Other legal documents that you need to consider are set out below.

• Intellectual property agreements – does the business own all the intellectual property and if so, has it been licensed to any third parties?
• Supplier contracts – what suppliers are currently working with the business, and will such contracts continue upon sale of the business?
• Employment contracts – what are the terms and conditions of the current employment contracts?
• Lease – what are the terms of the existing lease, and has the landlord’s consent been obtained to transfer the lease?

Conclusion

We have covered what you need to look out for in terms of business operations and legal documents. You can continue to read about the due diligence process in part 2 of this series which explains tax, areas and sales and in part 3 the assets, expenses and debts of the business.

For more information on the due diligence process contact LegalVision on 1300 544 755.