Due Diligence is the next step to get detailed info from the seller regarding its business, having decided to purchase an existing business.
As a Buyer, it is best practice to start your due diligence process by asking the following questions from the Seller:
1. Financial Information Supplied.
- Who prepared them?
- Are they Management Accounts or actual Audited Accounts prepared by the Seller’s Accountant that will also be submitted to the Australian Tax Office?
- Inventory List.
Are the listed items in good working condition? Request a service schedule to verify that the plant & equipment has been regularly serviced.
- Ask for a Balance Sheet if possible.
Look at the Debtor’s Ledger for any issues such as bad or doubtful debts (Don’t be alarmed if the Seller is reluctant to handover their Customer List prior to Settlement or the sale becoming Unconditional which is standard practice).
- Enquire the state of their Creditor’s Ledger.
- Look at Credit Terms offered to the Seller as this will give you an indication of how Suppliers look at the business as with regards to risk. Longer Credit Terms would suggest the business is looked upon by Suppliers as one that has a low risk at defaulting. On the other hand, if Suppliers only deal with the Seller on a C.O.D (cash on delivery) basis, this could mean that they are not comfortable at offering credit due risk. (However, it could also mean that C.O.D terms could offer substantial discounts and the Seller has a good cashflow to take advantage of it!).
- Look at the Gross Margin Percentage and compare with Industry Standards.
2. Assets (Plant & Equipment)
See if any item is under finance and make sure that in the Contract of Sale it is clearly stated that the Seller is responsible for paying out the loan and handing over the item Free of any Encumbrance (otherwise you may need to make arrangements to take over the current repayments)
3. The Premises
Ask for a copy of the lease (if premises are rented) and look at the security of tenure and full terms and conditions of the lease. It is a good idea to see if there is a Demolition or a Market Review Clause and look at how this may impact you in the future. It is best practice to consult your Solicitor for advice on all lease matters.
4. Intellectual Property
Ask for of methods used to protect trade secrets or know-how.
Enquire about who the key staff members are and are they likely to stay behind once the business is sold?
Ask if there has been any legal action taken against the business or is there one pending or likely to be made in the future. Again, your Solicitor is the best person to carry out the relevant searches as a matter of course prior to Settlement.