×

Due diligence when buying a business

generic business tax

When buying a business, you should always complete your legal due diligence investigations into the business. This should occur before you sign the contract, otherwise the contract should be made conditional on you being satisfied with your investigations.

Doing this helps you understand the value of the business and any risks associated with buying it.


So what should you investigate as a part of your legal due diligence?

Searches

Suggested searches include, but are not limited to:

  1. A company search of the seller (if the seller is a company) to make sure the company is in fact the correct owner of the assets subject to the sale and to ensure the seller is not under external administration.
  2. Bankruptcy searches of the seller if they are an individual (also for directors of a company).
  3. Trade mark search – a trade mark is a vital part of the intellectual property of the business. You will want to make sure it is properly registered and able to be assigned to you at completion.
  4. Personal Property and Securities Registers search to see if a secured party (such as a bank) holds an interest over any of the assets subject to the sale. These will need to be removed for you to receive clear title to the assets.
Lease

If the business operates at a premises subject to a lease, you will want to review that lease to ensure that rent is up to date, the terms of the lease are acceptable and any options have been properly exercised (or if not yet exercised, ensure the option period suits you).

GST

You should ensure that you take advice on the treatment of GST, whether the sale is exclusive of GST or whether the sale is a ‘going concern’.

Permits and licences

Some businesses depend largely on permits (i.e. restaurants, cafes and bars all need food licences and possibly liquor licenses). Without them the business cannot operate. You should make the appropriate enquiries with the bodies that issue such permits to ensure the seller actually owns these licences or permits and ensure they are able to be assigned to you.

Red Flags

You should be alert to sellers who:

  • Hide their reasons for selling;
  • Won’t allow you enough time to conduct your due diligence;
  • Won’t introduce you to important people such as suppliers or agents; or
  • Want to rush the deal.

Be aware that due diligence is different for everyone and no two checklists will be the same. These are just a few basic points to consider when buying a business and if you would like our assistance or wish to discuss further, please do not hesitate to contact us on 3223 6100.

Back to Articles
Redchip

Recent Articles

kristopher-roller-188180-unsplash
Does innovation need a soul?

Innovation has been the buzzword of business for some time now. What does it actually mean, is it now tied to technology, and how does it all impact modern Australian SMEs?

Read more
victor-freitas-546919-unsplash
On your marks: 6 tips when buying a fitness business

There are many nuances to the health and fitness industry and it’s important to do your due diligence before leaping off the starting line. Read through these six key considerations to help you get started.

Read more
gavel
New law: Update consumer agreements or risk $50k penalty

As of 9 June 2019, any business that provides services, or goods and services, and offers a warranty to its consumers against defects, must update its warranties with new compulsory wording.

Read more