When buying a business (through the purchase of business assets rather than shares), it is important to conduct a thorough due diligence to ensure that the business is a sound investment. Due diligence is the process of investigating and evaluating a business before a purchase is made. It allows a purchaser to identify potential issues or liabilities that may affect the value of the business and its ability to operate successfully. By conducting due diligence, a purchaser can make an informed decision about whether to proceed with the purchase or not.
Types of Due Diligence
Financial Due Diligence
- Reviewing the financial health of the business being purchased, including an analysis of its financial statements, tax returns, and other financial records to ensure that the business is profitable and has a strong financial position.
- Identifying any red flags such as unusual transactions, discrepancies in financial statements, or inadequate records.
- Assessing the accuracy of the financial information provided by the seller.
Legal Due Diligence
- Examining the business’s legal compliance, including reviewing its contracts, licenses, permits, and other legal documents to ensure that it is in compliance with all applicable laws and regulations.
- Identifying any potential legal issues or liabilities that may affect the value of the business or its ability to operate in the future.
- Reviewing any litigation or disputes that the business is currently involved in.
Employment/HR Due Diligence
- Understanding the number/types of employees (e.g. individual or unionised, and permanent, fixed term or casual), terms and conditions of employment and other relevant information to allow an informed decision of which staff to offer employment to.
- Identify leave balances and other liabilities to inform the purchase price.
- Identify key staff to allow for conditions around retention to be included in any Sale and Purchase Agreement.
- Reviewing any employment-related problems, disputes and/or litigation.
- Reviewing and considering any warnings, performance issues, health and safety issues or other operational issues that could impact business performance and therefore purchase price.
Operational Due Diligence
- Evaluating the business’s operations, including its management, employees, customers, suppliers, and other operational aspects to ensure that it is well-run and has a strong track record of performance.
- Identifying any operational risks or issues that may affect the business’s performance in the future.
- Assessing the quality of the business’s products or services and its reputation in the market.
Environmental Due Diligence
- Assessing the business’s environmental compliance and any potential liabilities related to environmental risks, such as hazardous waste or contaminated land.
- Identifying any environmental issues that may affect the value of the business or its ability to operate in the future.
- Reviewing any environmental permits or licenses that the business holds.
Intellectual Property Due Diligence
- Trademarks: Make sure that the business’s trademarks are registered and that they are not infringing on any existing trademarks.
- Patents: Make sure that any patents are valid and that they have not expired, and have a patent attorney evaluate their quality.
- Copyrights: Make sure that the business has the right to use any copyrighted material used in the business, such as software.
- Trade Secrets: Make sure that the business has not misused any trade secrets or confidential information belonging to a third party and has adequate protections to protect its own trade secrets.
IT Due Diligence
- Reviewing the business’s information technology infrastructure and systems to ensure that they are secure, compliant, and able to meet the needs of the business in the future.
- Identifying any potential risks or issues related to data privacy or cybersecurity.
- Assessing the quality of the business’s IT systems and infrastructure and its ability to support the business’s operations.
If you are thinking of buying a business, it is important to seek legal and financial advice early on. In this way, your trusted advisers can guide you through the due diligence process and ensure that you are aware of all the potential risks and liabilities associated with the purchase. Don’t hesitate to contact us for personalized advice and support on +64 4 472 0020.
See more of our business law articles here.