Buying a Business? Why You Must Always Ensure That You Do Your Due Diligence

22 November 2021
 Categories: Law, Blog


Did you know that approximately 126,000 Australian baby boomers may retire this year? Many of these are small business owners, and they may be searching for someone who will buy their business as a going concern. If you are aware of this opportunity and would like to purchase one of these entities, you need to conduct a fair amount of research. Crucially, you will need to perform your due diligence checks before you sign any contract, but what is involved?

Looking for Skeletons

Due diligence involves a thorough review of the business from a structural, operational, historical and financial perspective. Essentially, you need to see if there are any problems that you may not have been aware of during the negotiation phase. Armed with the information uncovered during the due diligence check, you will be in a position to decide whether this is the right move for you or not.

Interim Period

Usually, the due diligence process begins as soon as you have signed a letter of agreement that will effectively take the business off the market. You should note that this is not the same as a sale contract but is an intermediary step that allows you to access all relevant information. During this stage, the owner is not allowed to negotiate with other potential buyers.

Full Disclosure

While a seller will need to confirm that they have disclosed all relevant information to you as part of the final contract, you must still be diligent and do your own research as well. For example, you need to check legal records to see if there are any outstanding lawsuits or any risk of litigation. You need to find out if there are any outstanding mortgages, bank loans, overdrafts or other liabilities and be aware of any open contractual disputes.

Asset Value

If assets are included (such as machinery or equipment), then you can get an impartial evaluation and assessment of their condition. If you see anything that you do not like, you can then negotiate with the seller to make changes.

Debts and Liabilities

You will need to be very clear about what debts or liabilities that you will legally acquire if you sign on the dotted line. Often there will not be any, but you certainly need to know the full detail associated with such obligations.

Dealing With Employees

If employees are involved, this can often be a very sensitive situation. They may not be aware that the business is for sale, as the outgoing seller may be worried that they would seek opportunities elsewhere. Nevertheless, you may want to ensure that key employees will stay on, as they may have crucial knowledge about the business. Now is the time to address these issues.

Lawyers Required

These are just some of the areas you need to cover during a comprehensive approach to due diligence. Make sure that you are on top of all these matters by engaging a commercial lawyer with experience in this field. Contact a commercial law firm to learn more.