Buying a business - Due Diligence
When buying a business due diligence is extremely important. The process of due diligence officially begins once heads of terms have been agreed and issued. Most experienced buyers will however have performed their due diligence procedures by themselves at this stage. This period is used by the buyer to validate all information which has been supplied by the seller. If you are buying a business for the first time you should involve all of your professional advisors during the process. Do not let the fees of accountants and solicitors put you off, the money that you spend with them now could save you from losing a lot more in the future. Make sure that you have studied all of the relevant documents yourself, make a list of anything that you are unsure about and raise these points when meeting with your advisors.
As the buyer, due diligence is your opportunity to check through everything, make the most of this time and ensure that everything stacks up. If you have any reservations or if you unsure about anything you should speak up and make sure that you get some answers. This period is the last step before you sign on the dotted line and there will be no going back! Whilst this is probably not the most exciting part of buying a business it is probably one of the most important, take your time.
Listed below are some of the points to consider during due diligence when buying a business.
Financial statements and tax returns Although you will have probably been supplied with some financial information about the business that you are buying it is important to go through it again with your accountant, make sure that you have not missed anything. Try to use an accountant that you either know from previous dealings, or find one who has some experience with business acquisitions, preferably in the same industry as the business that you are considering.
Employee records Check through all of the relevant paperwork which has been supplied relating to any staff that will be staying on. Check how long those staff have been employed and what rights they have. When buying a business that involves the transfer of staff rights you cannot be too careful.
Licenses If the business requires specific permission or licenses to carry out any part of its procedures make sure that they are all current and in order. This is also a good opportunity to check the annual fees associated with these licenses. It may also be worth contacting the relevant organization to make sure that there will not be any potential problems with the transfer of the license into your name.
Equipment, plant, fixtures, fittings You should have been supplied with an inventory of all equipment, fixtures, and fittings that are included in the sale. At this time you should check firstly that all of the equipment that is needed to run the business is included. Once you are satisfied that this is in order you should check the condition and recent service records, is there anything that is likely to cause you problems. When buying a business that relies heavily on a small number of key pieces of equipment you must tread carefully. You should feel quite within your rights to ask for you engineer to be allowed access to inspect the equipment and provide you with an impartial report. If the seller has a problem with you doing this you need to ask yourself why.
Lease details The lease is probably one of the most important documents involved in the transfer of the business. When considering taking on an existing lease, or when negotiating a new lease always consult you solicitor. Leases are nearly always written using a lot of legal jargon, it is easy to miss something or to misinterpret the meaning of certain points. You should however try to read through it yourself, it has been known for solicitors to miss things too. Make a note of any areas that you do not understand and ask your solicitor to explain them to you. Some of the main points that you will be looking for are: Length of term – How long is remaining on the lease and what happens at the end of that period? Amount of rent – How much and when is the rent due? when will it rise and how will the increases be calculated?