I am often asked by clients do I really need to undertake due diligence as I know the business very well or is due diligence is a waste of money? My answers to the above two questions are an empathic Yes and No respectively.

Carrying out an effective due diligence on any business you are considering buying can be the difference between making money or financial disaster.

We carry out due diligence on a house when we buy it or shares when we consider investing so undertaking a comprehensive and detailed due diligence when considering buying a business is a must.

It is important to have a plan and ensure the parameters of what the due diligence inquiries are going to be are determined and agreed to together with an appropriate timeline.

Who will assist me with carrying out the due diligence?

Generally, the first point of call will be your accountant or financial adviser in relation to the financial aspects of the business. 

Once you are satisfied as to the financial aspects then your lawyer will review all the contractual and legal issues to ensure that the business has been complying with all its legal obligations and what is promised can be delivered.

At the outset the lawyer will try and establish the current status of the business and also work with the accountant and financial adviser to answer specific questions that may have arisen from their inquiries.

It is imperative that all your adviser work together to ensure nothing is missed and all possible issues that could arise are considered.

What should you consider during the due diligence period?

I often say there are really three sperate issues that need to be considered and they are:

1. The practical issues;
2. The financial issues; and
3. The legal issues.

The practical issues

The first matter I like to address is, why is the vendor selling?

It is important to understand why the vendor is selling and the time they have chosen to do so.

Are market conditions affecting the decision to sell or are there other matters which are requiring the vendor to sell such health, financial, litigation issues etc.

Has there been a change in the legislative environment that the business operates in which has caused them to sell or are there other environmental issues which are affecting the business such as limited product supply or a downturn in demand from clients or customers which will affect the operation and profitability of the business?

Often it is because there is a partnership split or the vendor is looking at a succession plan to move into retirement or for health reasons.

Whatever the reasons it is important to understand and know them so you can properly evaluate the decision and how it may or could affect the success of the business going forward.

The financial issues

Financial due diligence is a critical to assess the financial health of any business.

The businesses historical and current financial performance has to be examined in detail with a forensic eye.

This should establish the future profitability and forecasts whilst identifying any risks.

The list of financial information that should be examined is not finite but consideration should be given to examining the following:

• audited financial statements if available
• balance sheets
• bank and credit loans
• assets and liabilities together with the various registers
• cash flow projections both past and future
• capital expenditures details both recently and projected
• overall financial projections 
• profit and loss information
• taxation returns
• valuations

Whilst this is just a small cross section of which is often required it is an important starting position and will lead to more questions.

It is also important to review historical data as it can often give a very good insight into the financial performance of the business.

The legal issues

The legal issues like the financial issues are not exhaustive.

An experienced lawyer will be able to review the businesses records and identify any discrepancies or problems.

Some of the documentation that your lawyer should request and review are:

• company and partnership registers and corporate documents
• customer and client contracts
• employee and contractor agreement/contracts
• Insurance details and claims history
• Intellectual property details including ownership, licences etc.
• Lease, loan or other property related agreements, contracts etc.
• minutes of partners, directors and shareholders meetings, whichever is relevant
• plant and equipment details and their ownership

How can FC Lawyers help?

Our expert team have literally acted for thousands of business owners when buying and selling businesses and have in depth knowledge of market conditions and the issues facing SMEs.

We provide plain English advice which you can understand and pride ourselves on explaining the issues in a succinct and cost-effective manner.

Contact our team today to discuss your legal needs.