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14 Aug 2013

What are the key areas of due diligence?

Due diligence generally takes place prior to a sale of a business or after both sides of a purchase agreement have signed and accepted terms.  The items that are included, and the duration of the due diligence are negotiated as part of the agreement between the buyer and the seller.

The most common items that should be considered when buying a business include:

Legal and Tax

You should ensure you have legal advice from a Solicitor regarding any lease agreement connected to the sale.  Your Solicitor should also ensure that any Government mandates including water, health and sewerage are clear and don’t require addressing.  Further to this a check of any other legal issues the existing business may have is essential.  In regards to tax, you must take into account capital gains, stamp duty, GST or any other tax implications.

Finances

Ensure you have a thorough understanding of the businesses financial records including the accounts receivable; the profit and loss figures; the general marketing and sales information and the sales patterns over a significant time period.  A thorough understanding of any debts the business may hold is also essential.

Selling information

Due diligence should include a thorough analysis of why the business is being sold.  For example, is the industry slowing? Will there be new laws that effect turnover? Is the lease due to expire? How many staff are on the books? Is there new or significant competition?  These are just some examples that must be taken into account in order for the purchaser to make an informed decision.

Assets

Ensure you are aware of the actual assets you are purchasing.  This will include an understanding of the stock and non-tangible assets included in the sale.

 

The above mentioned are a general list of items that need to be considered.  You don’t want to purchase a business that appears solid at face value; only to later find out when a deeper investigation is executed that the seller was trying to hide something. Ensure that you consult a professional prior to considering any agreement.  As always Alert Property Group are here to provide assistance as required.

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