One of the most common questions we get asked when a client is buying a business is – what and how much should I spend on due diligence?

There is no simple answer, but research and preparation will save you time and money.

What is due diligence? 

Simply put it is the steps you take to avoid making a risky or wrong decision and not break any laws.

When buying a business, the onus is on you as the buyer to satisfy yourself as to the business and its viability. Whilst there may be some statutory requirements for the seller to disclose, you should always approach any potential business purchase on the basis that you must satisfy yourself first and foremost.

In a perfect world you would try and carry out the due diligence before signing a contract, but if that is not possible then you should be certain to ensure any contract you enter into has a period for due diligence and the contract cannot be binding until you have satisfied yourself as to the business.

It is important to ensure when negotiating any due diligence period, you have adequate time to carry out all your inquiries.

Who should assist me with my due diligence?

Often you will need a team to assist you in carrying out the due diligence.

The two most important member of that team will be your lawyer for the legal issues and your accountant for the financial aspects.

You may also have to engage an expert in the industry/profession to assist with the technical and associated issues.

Financial advisers and brokers often also play a significant role. Make sure you have had preliminary discussion with your financiers as to the limit of funding and the formula for calculating same, so you go into any negotiations aware of what financial limitation you have.

What information should I request to review? 

First you should always research and understand the industry that you intend to operate in. 

Understand the competition and factors that may affect the future viability of the business both from a financial and regulatory perspective.

The following list is not exhaustive but a starting point for the documents and information you should request:

• Equipment and stock including asset registers, leases, and warranties
• Financial information including tax returns at least 3 and preferably 5 years back, balance sheets, payroll information, leases and hire purchase agreements, loans including lines of credit and finance facilities etc.
• Human resource information including all staff, contractors, and consultants’ contracts
• Intellectual property which should include all registered and unregistered property such as business registration, copyright, designs, patents, trademarks
• Legal which will include contracts with suppliers and customers, searches to identify any encumbrances or guarantees for such matters as equipment or working capital, leases and hire purchase agreements, all licences, and regulatory licences etc, details of any legal proceedings against the business, any orders or history from a regulator and details of any insurance claims history
• Minutes of all meetings
• Policies and procedures
• Software being details of licenses and contracts in place.

If the seller decides not to supply some or all of the information that you have requested, you may have to sign a non-disclosure or confidentiality agreement.

It is always important to confirm the person you may be dealing with must have the authority to enter into the business sale agreement and to provide the due diligence documentation and information.

In any due diligence process it is important to conduct independent inquiries and searches to verify the information you are provided. This can be done through a range of both government and private database.

How can FC Lawyers help?

The business and corporate team at FC Lawyers are experienced in preparing businesses for sale and conducting due diligence in a large range of industries and professions.

Contact our team today to discuss your business legal needs.