Due Diligence in Business Transactions15 February 2022 in Business Law, Civil and Commercial Law
Due Diligence when Purchasing a Business
The purchase of a business is a significant endeavour and purchasers should conduct due diligence before completing the transaction. Due diligence refers to the process of making enquiries about a business in order to assess and minimise the risks associated with a transaction. Conducting effective due diligence investigations also allows purchaser to amend their sale agreement with the vendor to reflect due diligence findings. The process of due diligence will vary depending on the business being acquired and the circumstances of the transaction. The civil litigation lawyers at BSM can explain to you the matters that should be investigated during the process of due diligence. These include;
The purchaser should conduct relevant searches in relation to the vendor, including searches of ASIC records and bankruptcy searches. The purchaser should also make sure they understand why the vendor is selling the business.
The purchaser should carry out enquires in relation to the business’ employees. For instance, in relation to employment contracts and the terms and conditions of these contracts. It is also prudent to be aware of existing entitlements of employees such as annual leave and long service leave.
Purchasers should carry out appropriate enquires into business’ assets, including;
- Real estate
- Intellectual property such as patents and trade marks
- Plant and equipment
- Domain names
- Social media accounts
- The business’ name
The purchaser may want to seek a professional valuation of the business. Conducting a formal valuation can assist the parties in determining an appropriate purchase price for the business.
Books and Records
It is prudent for purchasers to make enquires in relation to the business’ books and records. This is an effective way to verify the financial position of a business and identify any financial liabilities. An accountant can assist purchasers with assessing the financial position of the company.
The purchaser should identify and examine existing contracts, in particular the crucial terms and conditions. The highly experienced business and commercial lawyers at Brander Smith McKnight are proficient at reviewing contracts and explaining any onerous or unusual clauses.
It is important to ascertain whether there are any legal proceedings affecting the business and to assess the business’ susceptibility to future litigation. A lawyer specialising in business and commercial law is able to scrutinise a business and provide an assessment of this.
The purchaser should also check for licensing requirements associated with the business. This may involve reading specific legislation which creates business licensing requirements. This legislation can be reviewed and explained to you in simple language by the BSM lawyers.
Due diligence also includes a consideration of the business’ tax obligations. This includes, income tax, GST, CGT, land tax and payroll tax. A business and commercial lawyer is able to assist you with this.
Where appropriate, purchasers can discuss issues of concern with the business’ stakeholders. Stakeholders such as employees, customers and business contacts can provide a unique insight into the value of a business.
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