When buying a business, it is important to check certain factors and validate the information you have been given about the business you are potentially buying.
After you have made an offer, you will be given records for the business and will have a limited period to conduct thorough due diligence.
This offers you the opportunity to see how your prospective business has been performing and should provide you with a clear and realistic idea of what the future of the business will look like.
It may also give you the ability to question the seller on specific issues with their businesses or provide you with additional information that may lead to a deal being abandoned or renegotiated.
Due diligence can be done in three ways:
Legal due diligence
This involves a legal expert checking over the business and confirming to you that all the regulatory issues are entirely addressed.
It should also expose any ongoing legal obligations, which may put the newly acquired or merged business at risk.
As part of this process, if your solicitor has separate specialisms in commercial property then they may be able to help you with any questions you may have about the premises you may be purchasing or leases that you are taking on.
Similarly, if they also have expertise in employment law they might be able to review existing staff contracts and benefits packages to ensure there isn’t anything that could sour the deal.
Financial due diligence
This requires checking figures and making sure there are no hidden problems before moving forward with the sale.
The buyer’s accountant will often be involved in this process and they will want to conduct a thorough investigation of any financial obligations, such as debts or tax liabilities, that the sale company may have.
Commercial due diligence
You should check any competitors of the business, and see how the business is placed within its sector.
You should only really begin due diligence if you have agreed terms and on a price with the previous business owner.
Once you have started due diligence, the owner might, if agreed, temporarily take the business off the market while you proceed during what is known as the exclusivity period.
This does not mean that the deal is done. Once the due diligence process is complete, you are still free to renegotiate or pull out of a transaction if you aren’t satisfied with your findings.
For due diligence support on your next commercial transaction, contact us today.
