Buyers of businesses are naturally concerned that they have made a “good” buy and that the representations made to can be proven to be true and correct.
To provide this assurance there will often be a condition in the agreement for sale for the buyers (or their professional advisors) to check the business further. For the smaller business this may be as basic as approving the lease and the financial statements.
For larger businesses the process may be far more complex and take much longer to complete. The focus usually will be on three main areas: legal, financial and operational. Separate experts may be required to assist the buyer to evaluate the different areas.
Business owners planning to place their company on the market need to anticipate the probability of some form of due diligence requirement. To ensure a “win – win” deal they need to be aware of what the buyer will want to see and have the information ready for inspection, to be certain that no unexpected surprises will emerge. The seller needs to see the process from the buyer’s perspective.
Missing documents, lack of co-operation, or a lack of understanding of the process can lead to uncertainty, delays, suspicion and, (often), cancellation of the contract. The idea is to be helpful, transparent and open with the buyers.
The experienced business broker should educate both the buyer and seller on the due diligence process so that both have reasonable knowledge and realistic expectations. However, it is not the broker’s job to conduct due diligence for the buyer. The broker can facilitate the flow of information, anticipate obstacles and check that those responsible for various tasks are carrying them out in a timely fashion.
Below is a list of information that may be required under due diligence for a mid- size business. This is not meant to be complete or appropriate for any specific business.
- business structure – company, partnership, sole trader
- historic summary
- Banking history
- financial statements and BAS, GST returns
- lease details
- assets schedule and identity of any plant, , leased, hired, or not passing in the sale
- organization structure, employment contracts and staff schedule
- pricing, structures, discounts, terms of trade
- marketing and advertising strategies and commitments
- any trademarks or patents
- contractual arrangements e.g. franchises licenses, supply contracts etc
- computer software and other IT information
- any legal issues
- Staff Roster & Wages Summary
- Work in Progress- Marketing
- Franchise agreements