Due Diligence when Buying a Business
Sirpa Gunn • April 24, 2019
Due Diligence Investigation of the business before buying.
If you are considering buying an existing business, you need to do your due diligence. Doing a due diligence investigation allows you time to find out more about the business and engage professional advice. This enables you to make an informed decision as to whether this business is feasible and right for you.
What is Due diligence?
Due diligence refers to the process of evaluating a prospective business before purchasing. This will allow you the opportunity to thoroughly investigate all aspects of a business including the business’s operations, financial performance, legal compliance, employee staff arrangements, customer contracts, intellectual property, assets and other details.
Why is due diligence necessary?
This is your opportunity to assess the value of a business and the risks associated with buying it. There is often a lot more involved in operating a business that one might expect. If you don’t do your due diligence you may end up making a bad decision and buy something that isn’t as you thought it would be. In particular you should check that any information presented by the Vendor (especially with regards to financial forecasts and reports) is accurate. You must satisfy yourself that the company is profitable and any projections as to future earnings are realistic and achievable.
When is the best time to conduct your due diligence investigation?
The due diligence process can be carried out either before or after an agreement for sale and purchase is entered into. Where it is to be carried out after an agreement has been signed, the agreement will need to include a “due diligence” condition. This condition provides a set timeframe for you to carry out your investigations. It should also say that the vendor will provide or to allow access to the relevant information and documentation, and give you the option to cancel the agreement if your investigation is unsatisfactory for whatever reason.
Who should you involve in the due diligence process?
We recommend that you have the financial information and forecasts checked by an accountant.
They should also advise on any potential tax implications and the best ownership structure for business purchase. You should also have the Sale and Purchase Agreement, lease and any supplier, customer or employment contracts that you would be taking over reviewed by your lawyer. Valuers and other experts may be required depending on the type of business and industry involved.
What is included in a Due Diligence Investigation?
Due diligence can take many different forms as it varies from industry to industry. We would be happy to discuss your particular situation with you. Some of the common issues covered however are:
- Accounts, financial information and tax records.
- Leases, employment, supplier contracts, customer terms of trade and any contractual agreements to which the business is party.
- Proprietary information such as copy rights trademarks patents.
- Systems, operating procedures, workflows – this may involve spending time in the business observing how it operates.
- Customer references.
- Industry regulations, health and safety requirements and compliance issues.
- Inspection of the condition and value of the assets including property, vehicles equipment and machinery.
- Should you sign a confidentiality / non disclosure agreement?
- The information that Vendors disclose during due diligence is often highly sensitive and confidential. It is not uncommon for them to as you to sign a non-disclosure agreement / confidentiality agreement before you access this information. You should ensure this agreement relates only to keeping the business information provided confidential and does not limit or prohibit you from operating a similar type of venture that you may already have in mind. It is always a good idea to get confidentiality agreements checked by your lawyer before you sign.
If you have any queries regarding buying a business our team of experienced commercial lawyers in Auckland are here to help. Get in touch with our friendly legal team on 09 237 1008
This article does not constitute legal advice and should not be relied upon as such. It is intended only to provide simplified general information on matters of interest and it is not comprehensive. You should seek legal or other professional advice and not relying on any of the contents of this site.
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