When acquiring ownership in a business via the purchase of its shares, it is the purchaser’s responsibility to undertake a due diligence investigation before the contract for the sale of business is exchanged.
A due diligence investigation involves inspecting the company’s operations, transactions and registers, and ascertaining what liabilities, if any, exist. The process can be tedious and time consuming, however, it is an integral part of the purchase process. A business may look good on paper but the reality of the situation may be quite different. A due diligence investigation will unmask any discrepancies between what is being advertised and purportedly sold, and what is actually being sold. No one wants to end up with a lemon.
The primary thing that a due diligence investigation should concern itself with is identifying whether the seller has any existing or contingent liabilities. If liabilities exist, you can either negotiate a price reduction or obtain indemnities for the same.
Inspecting the company’s internal management structure
All companies are governed by a corporate constitution or the replaceable rules found under the Corporations Act 2001 (Cth) or a combination of the two. At the outset, your due diligence investigation should inspect the internal management documents and cross reference them against the copy filed with the Australian Securities and Investments Commission (ASIC).
Upon the sale of a business, the purchaser will not only obtain control of the company, but will also assume responsibility for any pre-existing defects in general compliance. Accordingly, your due diligence investigation should identify any such defects and breaches.
Securities over corporate assets
More often than not, companies leverage their assets in an effort to aid their business operations. As a result, interested parties may have registered interests/charges over the company’s corporate assets. To ascertain whether this is indeed the case, your due diligence investigation should entail a thorough search of the Personal Property Securities Register (PPSR).
Your due diligence investigation should also check licensing requirements at the federal, state and local levels. In particular, it is essential to ascertain whether all relevant licenses are current, transferrable and free of charges and securities.
If the company is heavily reliant on supply contracts, distribution contracts, franchise contracts or leasing contracts, ensure that the contracts are valid, renewable, transferrable and that all necessary payments under the same have been made.
Upon the purchase of a business you will inevitably assume both the benefit and burden of any employment arrangements. It is crucial to identify core employees and secure their continued engagement. Similarly, it is just as important to note who the non-core employees are and whether their service can be terminated and, if so, under what circumstances.
Check that the company is up to date with its workers’ compensation insurance, superannuation contributions and any other relevant policies. If there are amounts outstanding, it may be necessary to obtain indemnities.
Intellectual property often forms an integral part of business. If a third party owns the rights to certain intellectual property and merely licenses or contracts it to the business being purchased, it is vital that the due diligence investigation ascertain whether the intellectual property rights can be transferred to the potential purchaser.
Upon the sale of a business the purchaser will acquire all the rights and liabilities of the business. No purchaser wants to obtain someone else’s tax liability. Accordingly, income tax, capital gains tax, GST, land tax and any payroll tax liabilities will have to be ascertained. If there are amounts owing, an indemnity should be obtained.
These are only some of the due diligence investigations that may need to be undertaken when purchasing a business. Ultimately, the scope and breadth of the investigation will depend upon the nature of the business being acquired. If you would like to know more about the purchase process, why not contact our friendly team of LegalVision’s commercial lawyers. We would be happy to assist you with any queries that you may have.