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Conducting due diligence when buying an existing business

Posted on December 2, 2020 by admin

You’ve found the perfect business for you to buy. It fits all your requirements and you’re in a position where you can comfortably buy the business. What’s next?

Before you sign the contract to finalise the buy, it is important to conduct due diligence. For this, you should review the financial records, business operations and legal documents. These will prepare you to manage the business and identify any risks or problems in process that you might need to tackle head on. You will also be able to better understand what will be expected of you as owner of the business and which responsibilities have been allocated to that position. 

You should review items such as: 

• Licenses and permits: Have all the necessary permits and licences been acquired, and if not, look into why this might be the case – were they denied a permit due to any issues with the business?
• Contracts and leases: Have you spoken to the landlord and whether they’ll be transferring the lease agreement/negotiating a new lease? Is the business in contract with another that is problematic?
• Agreements: Are there any agreements the business is in that you don’t feel comfortable with?
• Status of plant, equipment, and fixtures: What is the current status of the equipment and machinery? When will you need to replace it? Has it been approved by the relevant authorities?
• Assets: Identify any assets that are under the business. Does it have any intellectual property? 
• Inventory: How much inventory is there? Is it included in the sale? How is the inventory managed and will you still be able to source it from the same place? What is the status of the current inventory i.e. can it be used?
• Liabilities: What liabilities do you need to be aware of? Are there any outstanding debts? Any fines, warranties, refunds that need to be paid for? 

Additionally, you need to conduct financial due diligence. Examine the past 3 to 5 years of the following financial documents:

• Tax returns
• Business activity statements (BAS)
• Records of accounts receivable and payable
• Balance sheets
• Profit and loss records
• Cash flow statements
• Sales records

You should examine these to make sure that record-keeping has been conducted and maintained appropriately. This will also inform you of any changes that need to be made once you start running the business yourself.