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Are you Getting Value for Your Money? Do Your Due Diligence
Some aspects of a business are more valuable than others. There are some aspects that you simply can’t live without. For example, whilst an owner of a café can easily replace a coffee machine if it fails, it may not be as easy to replace the taste of their particular coffee blend, which their particular clients are fond of, if they have a fall out with their supplier. Similarly, to replace the barista whom the customers share a quick laugh with every morning when they grab their daily dose might also be problematic. As a result, buyers need to ensure that the key aspects of the business are sound when they are buying a business. They need to make sure they are getting value for money.
To do this, buyers need to undertake a thorough “due diligence” of key aspects of the business. Due diligence simply means an investigation. A bit of CSI; but for the business scene. The business sale contract will be made “subject to due diligence” for a specific period of time to allow the buyer to make their investigations and to pull out or re-negotiate if things are not what they expected. As it is impossible to check every single aspect of the business, it is important to check the key ones. Here is a list of some of the key aspects of a business to consider:
Intellectual Property (IP)
A business’s IP can be one of its most valuable assets. For this reason, a buyer must ensure that the IP is properly identified, that the seller is in fact the legal owner and that it can be transferred to the buyer without any hassles.
Sometimes, a business’s success may rest in the hands of some key workers of the business. If so, this is risky and buyers must take steps to ensure those workers are staying or at the very least, their knowledge is adequately passed on to the buyer.
When the success of a business is reliant on its location, the lease becomes particularly important. The buyer needs to ensure that the business can be lawfully run from the premises and that the lease allows the buyer to do what it needs to from the premises for a satisfactory period.
Licences and Permits
Businesses in some industries require specific licences and permits to operate. Otherwise, they can’t operate legally. A buyer needs to check this out for themselves. When there is a requirement, the buyer needs to establish whether the seller has all the licences and permits required to run the businesses, whether they are transferable or whether the buyer can successfully apply for such licences.
If the revenue of the business is generated from some key customers, the agreements with those customers should be looked at carefully. A buyer must understand on what terms they are providing goods or services and determine how easy it is for the customer to end the relationship and therefore the revenue.
Similarly, if the business is reliant on some key suppliers in order to do business, the arrangements with those suppliers are important.
At the end of the day, the buyer has to be comfortable that they are getting value for money. If they and that things are not as they expected, they will usually have the option of terminating the contract under the due diligence provision in their contract. However, if a buyer discovers something that affects the value of the business and this was not disclosed to them, they have every option to re-negotiate the sale price rather than to end the deal. A buyer should determine what impact their discovery has on the value of the business and seek a reasonable adjustment accordingly. This will normally be handled through the party’s lawyers though it is a good idea to gauge the seller’s business broker first to determine their views. They may also be able to assist with the process.
When it comes to due diligence, your lawyer and financial advisor are equipped to help you determine where to start and what questions to ask or documents to review. This is especially useful if you are buying a business for the first time or if you are new to an industry.
Get in contact with LINK, the authority on selling businesses, to see how our brokers can help you buy, sell or value a business.
This article was written by Joe Kafrouni who is a small business law specialist and the principal of Kafrouni Lawyers. He is also on the executive committee of the Australian Institute of Business Brokers. He writes a regular blog on his website www.klaw.com.au on important issues and stories concerning the buying and selling of businesses.