Whilst any sensible person will take care to check all aspects of any large purchase they make, this goes on to an even higher level when it comes to purchasing a business. Given that the sum of money that you are like to be paying will be substantial, this makes the financial risks significant. In addition, if you purchase a business without due diligence you could find yourself in a situation where you fall foul of commercial law, due to actions taken by the previous owners.
The key phrase in the first paragraph is ‘due diligence and within this article, we are going to outline the core principles of the due diligence you should take if considering buying a business. In addition, we also urge you to employ the services of a commercial lawyer who can ensure that every aspect of the transaction is legally sound and provide you legal protection too.
When you are carrying out your due diligence, almost all the checks that you make will fall within one of three distinct areas. These are financial, operations, and legal. Below we outline some of the specific checks you will want to make within each one of these.
Commercial And Business Operations
These checks relate to the day to day operations of the business. It is a means of checking that the viability of the business you are considering purchasing is sound and that the prospects for its future success are good. Individuals queries could include:
- Opportunities For Growth: Does the business exist in an expanding or declining industry?
- Location: Is the business’s location a positive or negative influence on its success? Are there any building developments imminent?
- Local Competition: How strong or weak is its competitors if it has any?
- Key Assets: What condition are essential assets such as computers, vehicles, office furniture? Are they in imminent need of renewal?
One final question to ask in this is one of yourself, and that is, “Do your skills, knowledge and experience match what is required to run this business successfully?”.
Likely your most important consideration will be the financial state of the company. This will require looking at their annual accounts, management accounts, valuations of their assets and a detailed breakdown of liabilities. Other financial elements to check are:
- Profitability: Is the business making profits or likely to make profits soon?
- Tax Returns: Are they up to date and is the correct amount of tax being calculated?
- Sales Performance: Are sales increasing or decreasing? Are the order books full or empty?
- Valuation: Taking everything into account, is the valuation of the business accurate?
An area where your commercial lawyer will be of particular help will be due diligence on the business’s legal documentation. Examples include:
- Seller Information: Who is selling the business? Who are the directors?
- Ownership Of Assets: Who owns patents, trademarks, copyrights, and the business’s tangible assets such as machinery and property?
- Existing Contracts: What is the legal status of contracts for leases, with suppliers and with customers?
- Employees: Are employee contracts valid and legal? Are any pay awards outstanding?
- Legal Compliance: Is the business compliant with all current commercial and employment laws? Are there any pending lawsuits or legal penalties?
Professionals Who Can Assist You With Due Diligence
Carrying out due diligence on a business can take time, it needs to be thorough, and it also requires a high degree of knowledge within each of the areas we have referred to. For this reason, we highly recommend you employ experts in specific fields to help you.
We have already mentioned using a commercial lawyer who should be the first person you seek out. Beyond them an accountant who can assess and evaluate all the business’s financial documentation is essential. You may also wish to include a business advisor or consultant who can provide you with an independent assessment of how the business operates and pinpoint commercial issues concerning its viability.