In parts 1 and 2 of this article series, we have covered several key areas of review in a due diligence process. We covered the operational, industry and legal areas in part 1. We then covered the tax, finance and sales areas in part 2. In this final part, we look at the assets, expenses and debts of a business.
Some key things to consider in terms of the business assets are:
- whether you are purchasing the tangible assets or the shares of the business;
- the book value, market value and replacement value of the fixed assets;
- the value of the existing inventory and what adjustments are required between the date of exchange and date of completion;
- the rate of stock turnover and whether the business’ stock turnover is in line with other businesses in the same industry;
- how the intangible assets, such as intellectual property, branding and logos, will be transferred;
- the state of the existing equipment;
- the depreciation of existing equipment; and
- whether existing equipment is leased or owned.
When looking into the expenses of a business, you need to ensure that all business expenses have been shown, and determine:
- whether the seller has been paying the expenses through another business or entity;
- whether the seller has avoided certain expenses such as equipment repair;
- whether there are any large expenses due soon;
- whether existing expenses will be increased;
- if some expenses have been paid in advance, and if so, whether you will be required to reimburse the seller for such prepayments;
- what ongoing arrangements and outgoings you are required to honour; and
- how costs and expenses are allocated to the products and services that the business sells.
If a business cannot repay its debts, it is deemed insolvent. When looking at the debts of a business that you are buying, you need to consider:
- whether existing assets of the business, including equipment and intangible products, are free of debts and liens;
- whether there are any contingencies such as warranties or court actions;
- whether the cash flow from the business will be adequate to meet each debt of the business as it falls due; and
- whether there are outstanding loans which need to be repaid in the short/medium term.
This article concludes this series on the key areas of review in a due diligence process. Due diligence is a very important process and should be conducted carefully to ensure that you are paying a fair market value for the business you are buying. Our lawyers are experienced in sales of businesses, and would be happy to assist regardless of whether you are buyer or seller. If you require any assistance, or would like some general guidance on the normal sale of business process, get in touch today!