As a purchaser, you must conduct due diligence before the sale. This is the formal process by which the business’ assets and liabilities are evaluated. If due diligence is not conducted comprehensively, you may find yourself in difficulty when you later discover that, for example, the business has liabilities that you cannot meet and that should have been considered in the sale price.
It is best to have an experienced lawyer conduct due diligence for you. The kinds of things your lawyer will ask for during this process include:
- Financial documentation showing how profitable the business is and the costs involved in running it, as well as the value of all the assets
- Key contracts
- Leasing arrangements
- Employee arrangements, including employment contracts, entitlements etc
- Details of any current or threatened legal action regarding the business or company
- Other liabilities (eg outstanding debts, refunds and warranties)
- Evidence of compliance with certain legislation or regulations
- Currency of licenses and/or permits
- Evidence of who owns the business and whether they have a legal right to sell it
- Industry or general requirements affecting the business
You should also consider the structure of ownership. A business may be purchased in the name of a sole trader, partnership, company or trust, depending on your circumstances. Your lawyer can advise you on the best structure to use, and can consider aspects of taxation and asset protection to safeguard your position.
During negotiations, you will need to consider various aspects such as restrictions: otherwise the vendor may approach the business’ clients after the business is sold or compete with you. Your lawyer can advise you on the appropriate restrictions to ask for in your circumstances.
Your lawyer can also help you assess the following risks:
- Employment issues including the departure of key individuals from the business
- Inheriting plant and equipment that is faulty or obsolete
- Preservation of the goodwill or reputation of the business
- The business may have no real intellectual property that is transferable, or it may have failed to sufficiently protect its intellectual property