Conducting due diligence when buying a business is all about making sure you know exactly what you’re getting yourself into.
Taking place after terms have been agreed, due diligence is your chance to closely examine the business to authenticate claims made by the seller about the business. If you discover previously undisclosed problems, you may wish to renegotiate terms or walk away from the deal.
It’s a considerable undertaking and one you shouldn’t begin without the help of an accountant, solicitor and/or business broker.
Be as thorough as possible –
There are three main areas to focus on when you perform due diligence.
Commercial due diligence
The commercial part focuses on operations and the business’s place in its market: how things work day to day; typical customers and how they perceive the business; market size, growth
This is your chance to get to know the market you’re entering, business processes and the perspectives of employees, customers
As well as verifying that you’re buying the business you thought you were buying, it’s a great chance to familiarise yourself with how the business functions before you take over.
Commercial due diligence checklist
- Market size, growth, relevant trends
- Stock and inventory
- Perceptions of customers, suppliers
- Systems and processes
- Products and services
Financial due diligence
The most important financial consideration is finding a clear paper trail. If there are financial transactions or processes that haven’t been recorded by the current owner, you could encounter problems further down the track.
If something doesn’t sit right, be upfront and ask the seller what their plan is to remedy any discrepancies before you take over the business.
Financial due diligence checklist
- Past, present and projected financial performance
- Business maintainable earnings (BME)
- Salaries and wages
- Bonds and guarantees
Legal due diligence
The legal side of due diligence is arguably the trickiest to understand, with arcane terminology and obscure technicalities to get your head around. But that’s what solicitors are for; proceeding without professional help could cause major headaches later on.
Legal proceedings are not unheard of in business and it’s not necessarily a ‘red flag’ if the business has some legal issues in its past – or even if proceedings are ongoing.
But alarm bells should ring if the seller fails to disclose these problems. It’s up to you to do the legwork and uncover anything lurking in the
Legal due diligence checklist
- Trademarks and business names
- Any dealings with the ATO
- Legal claims and risks
- Past, present or potential liabilities
- Contract terms
- Claims and warranties
- Employee entitlements
The current owner will expect you to conduct due diligence and should be ready for you to talk to customers, employees, and suppliers, as well as investigate the business’s history and financials. Don’t hold back – ask all the questions you need to, get everything in writing and understand exactly what you’re getting into.
If you’re satisfied with your findings, you’re nearly there – now it’s time to close the deal.