Part 2: What are the key areas to review in a Due Diligence process?

In part 1 of this series, we discussed 2 key areas of review in the due diligence process: – business operations and the industry, and legal documents.

In this part 2, we look at the areas of tax, finance and sales, and point out some additional considerations which you may wish to consider before making payment of the full purchase price for the business.

For these areas, we recommend having an accountant, tax adviser, or other financial adviser assist in reviewing the documents, as they will be able to provide advice on the viability of the business and determine whether the price you are paying is an appropriate value.

Tax

Your tax position can make a lot of difference in terms of the profit that you could be able to obtain from this transaction. We strongly recommend that you discuss your options with a tax adviser prior to purchasing the business so that you are able to structure this transaction in a way which is most favourable to you.

In addition to assisting you with structuring the transaction to be most tax beneficial to you, your tax adviser will also be able to provide you with guidance on other tax-related matters such as:

• Stamp duty payments;
• GST and other tax implications of purchasing this business; and
• Capital gains tax and how they will impact you if you wish to sell the business at a later time. 

Finance and sales

A well managed business will have organised and detailed financial documents. Important financial documents include balance sheets, profit and loss statements, tax returns, bank statements, and purchase and sales records. It is normal to request that these be provided for the last 3 years.

Things to consider after reviewing the relevant financial documents are:

• whether the records are well kept;
• whether the financial documents show potential for growth;
• the general pattern of sales and profits of the business;
• the effect of inflation on the performance of the business;
• sales targets;
• average sales on a month-by-month analysis;
• whether a particular group of customers make up a majority of the customer base;
• customer loyalty;
• current resources of the business;
• bad debts;
• fluctuations in sales and profits; and
• whether particular items have been sold on warranty and if you will be expected to meet such warranties.

Conclusion

In parts 1 and 2 of this article series, we have covered the operational, legal, tax, and finance and sales aspects of a due diligence review. For information about assets, expenses and debts in the due diligence review process, stay tuned for part 3! To speak with a business lawyer from LegalVision, call us on 1300 544 755.

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