When looking at buying a business, it is important to undertake a thorough due diligence to make an informed decision as to whether to proceed with an acquisition. Here are 8 areas to review when conducting a due diligence for the purchase of a business.

#1 – Corporate Structure and General Matters

When purchasing a business, consider the business structure you will use and review business information.

– Decide on the legal business structure you will use to purchase the new business (examples include: company, trust, partnership and sole trader).

– Have you sought accounting advice on the best way to handle the business purchase and your business finances?

– If the business you are purchasing has been operating as a company, conduct an ASIC company search to verify the seller and check that ASIC compliance is all up to date. Obtain and review minutes of previous board meetings.

– Review the business purchase agreement carefully and seek professional advice.

– Review the lease for the business premises. Consider if you will continue to operate in the current premises or vacate when you take over the business.

#2 – Taxes, Compliance and Regulatory Matters

The due diligence process should include a review of taxation and compliance when purchasing a business.

– Have you ensured all tax obligations are up to date?

– Obtain and review at least last 3 years of income tax returns.

– Review ATO correspondence and determine if any private rulings, tax elections or amended ATO assessments apply.

– Understand capital gains tax obligations and concessions. The business you are purchasing is an asset and at some point, you will want to sell it. Capital gains tax may apply.

– If the entity is required to be registered for GST, check GST obligations are up to date.

– Obtain an understanding of other taxes and duties that may apply to the business. These include but are not limited to fringe benefits, payroll tax and transfer duties.

– Consider GST implications when the business is purchased. Is the purchase GST free due to acquisition of a going concern?

#3 – Strategic Fit and Industry

It is important to review business operations and the industry environment as part of the due diligence process.

– Do you understand the seller’s reasons for selling?

– Is the type, size and industry of the business compatible with your interests, experience, personality and capital.

– Have you reviewed the business’ policies and procedures? Are work health and safety policies up to date? Does the business have necessary permissions to operate?

– What role does the seller play in the day to day operation of the business and will you be taking on these roles.

– Are you able to raise additional capital if the business requires it?

#4 – Intellectual Property

Intellectual property can be an important asset/s of the business. It is a factor that is used to determine the value of a business and is often reviewed in the due diligence process.

– Does the business being purchased have any registered trademarks and should additional trademarks be registered?

– Have business trademarks been valued – trademarks can make up a large component of a business’ goodwill.

– Have you obtained the business’ intellectual property portfolio?

A business’ intellectual property portfolio can include (but is not limited to):

– Trademarks

– Domain names

– Business names

– Business manuals and procedures

– Graphic logos

– Administration access to social media accounts, website, online store and online apps.

#5 – Material Assets

When buying a business, a review of the business assets you are purchasing should be carried out so you know exactly what you are purchasing:

– Obtain a list of assets/equipment and check they exist. Do any assets require repair? If so, which will be liable for the repairs – the purchaser or seller?

– Are any of the equipment leased? Will the leases be paid out by the seller when you purchase the business or will you be liable for the lease payments upon purchase of the business.

– Obtain an independent valuation of the assets you are purchasing.

– Review stock lists and conduct a stocktake before finalising the purchase. Ensure stock on hand does not include obsolete stock that should be written off.

– Ensure stock purchased but not on hand (ie. stock in transit or on consignment) is accounted for in the financial statements.

#6 – Contracts and Litigation

When buying a business it is important to seek legal advice – some issues to consider are:

– Are there any legal proceedings pending against the business or the seller?

– Have you obtained and reviewed contracts that are in place with the business you are purchasing.

– Investigate for any legal proceedings with former or current employees.

#7 – Employees and Management

Employees are integral to any business. When undertaking due diligence, it is important to review employee information.

– Have you obtained a list of employees and reviewed their employment contracts, entitlements, award rates and conditions?

– Have all outstanding employee entitlements been accounted for and accrued? Who will be responsible for payment of accrued benefits upon purchase of the business?

– Is the workers compensation insurance policy and premiums up to date.

– Review management and reporting structure. Is the structure adequate or will it require change – consider how management will respond to such change.

#8 – Financial Records

When buying a business, the due diligence process should involve a detailed review of the business’ financial data.

– Obtain and review historical financial records for at least the past 3 years. This includes a review of balance sheets, profit and loss statements, cashflow statements, purchases and sales records and bank statements.

– Obtain aged receivables list. Review aging of receivables and consider if a provision for doubtful debts is required.

– Obtained aged payables list. Review aging of creditors and investigate reasons for old payables. Do old payables still require payment and why has the debt not been paid? Is the business in dispute with any suppliers?

– Review cashflow forecasts and profit and loss projects.

– Analyse net profits. Are sales records reliable and review sales patterns. Review expenses to ensure expenses in the profit and loss statement have actually been incurred by the business.

– Review sales contracts and conditions. Are warranties and refunds offered? If so, has financial allowance been made to fund such commitments.

The above is not an exhaustive list. This information is general and should not be relied upon as advice. Professional advice should be sought when conducting a due diligence for the purchase of a business. The team at EMspire Advisory are experienced accountants, bookkeepers and tax agents in Sydney. Contact us today and we can help you create, grow and succeed in business.