Due Diligence When Buying a Business - The Best Investment

Some aspects of a business are more valuable than others. These are so crucial that entrepreneurs cannot live without them. For example, while a cafe owner can easily replace a coffee machine, it may be challenging to replace the taste of the coffee blend, which their clients cherish, if they have a fall out with their supplier. Similarly, replacing the barista with whom the customers share a quick laugh every morning when they grab their daily dose might also be problematic. As a result, buyers need to ensure that the business’s key aspects are sound when buying a business for sale in Sydney. They need to make sure they are getting value for money.

To do this, buyers need to undertake a thorough ‘due diligence’ of key aspects of the business. Due diligence simply means an investigation. A bit of CSI, but for the business scene. The business sale contract is made ‘subject to due diligence’ for a specific period of time to allow the buyer to make their investigations and to pull out or re-negotiate if things are not what they expected. As it is impossible to check every single aspect of the business, it is important to check the key ones during the due diligence. Hiring a lawyer and accountant for the task of maintaining accuracy is highly recommended. Here is a list of some of the key aspects of a business for sale that must be considered:

1. Identify the Intellectual Property (IP)

A business’s IP can be one of its most valuable assets. For this reason, a buyer must ensure that the IP is properly identified, that the seller is, in fact, the legal owner and that it can be transferred to the buyer without any hassles. If the owner is uncomfortable sharing this information, the prospective buyer can offer to sign a non-disclosure agreement to protect the confidential business data.

2. Financial Health of the Business

It is vital to check the financial health of the business to evaluate its profitability and growth potential. It requires the assistance of an expert accountant who can check the historical financial data, including financial statements, tax returns, BAS, sales records, etc. It allows the buyer to check the stability of the business for sale in Sydney.

3. Review Employee Status

Sometimes, a business’s success may rest in the hands of some key workers. If so, this is risky, and buyers must take steps to ensure those workers stay or, at the very least, that their knowledge is adequately passed on to the buyer.

4. Understand Lease Obligations

When the success of a business is reliant on its location, the lease becomes particularly important. The buyer needs to ensure that the business can be lawfully run from the premises and that the lease allows the buyer to do what it needs to from the premises for a satisfactory period. The seller must transfer the lease to the buyer and get the landlord’s consent for this transition.

5. Evaluate the Plant and Equipment

The buyer must appraise the plant, equipment, and fixtures to determine their condition and maintenance requirements. This can help them understand the overheads related to maintaining efficient operations, and if refurbishment is needed, which can add more costs to their expenses.

6. Check for Licences and Permits

Businesses in some industries require specific licences and permits to operate. Otherwise, they cannot operate legally. Buyers need to check this out for themselves. They can find this information through the Australian Business Licence and Information Service (ABLIS). When there is a requirement, the buyer needs to establish whether the seller has all the licences and permits required to run the business, whether they are transferable or whether the buyer can successfully apply for such licences.

7. Assess Customer Contracts

If the revenue of the business is generated from some key customers, the agreements with those customers should be examined carefully. A buyer must understand on what terms they are providing goods or services and determine how easy it is for the customer to end the relationship and therefore the revenue.

8. Identify the Key Suppliers

Similarly, if the business relies on some key suppliers to do business, the arrangements with those suppliers are important.

At the end of the day, the buyer has to be comfortable that they are getting value for money. If they find that things are not as they expected, they will usually have the option of terminating the contract under the due diligence provision. However, if a buyer discovers something that affects the value of the business and this was not disclosed to them, they have every option to re-negotiate the sale price rather than ending the deal. A buyer should determine what impact their discovery has on the value of the business and seek a reasonable adjustment accordingly. This is handled by the lawyers. However, it is a good idea to gauge the seller’s business broker first to determine their views. They may also be able to assist with the process.

Wrapping Up

When it comes to due diligence, your lawyer and financial advisor are equipped to help you determine where to start and what questions to ask or documents to review. This is especially useful if you are buying a business for sale in Sydney for the first time or if you are new to an industry.

Disclaimer

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. You should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

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