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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.

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