You are looking at purchasing a business and you’ve found the perfect one to buy. It fits all your current requirements, and you’re in a position where you can comfortably buy the business. So what comes next?
Before you sign the contract to finalise the buy, it is crucial to conduct due diligence. For this, you should review the financial records, business operations and legal documents. These will prepare you to manage the business and identify any risks or problems in the process that you might need to tackle head-on. You will also be able to better understand what you expect as the business owner and which responsibilities are part of that position.
Purchasing A Business – Key Areas To Review
You should review items such as:
– Licenses and permits: Have all the necessary permits and licences been acquired, and if not, look into why this might be the case – were they denied a permit due to any issues with the business?
– Contracts and leases: Have you spoken to the landlord and whether they’ll be transferring the lease agreement/negotiating a new lease? Is the business in contract with another that is problematic?
– Agreements: Are there any agreements the business is in that you don’t feel comfortable with?
– Status of plant, equipment, and fixtures: What is the current status of the equipment and machinery? When will you need to replace it? Have the relevant authorities approved it?
– Assets: Identify any assets that are under the business. Does it have any intellectual property?
– Inventory: How much inventory is there? Is the inventory included in the sale? How is the inventory managed, and will you still be able to source it from the same place? What is the status of the current inventory, i.e. is it usable?
– Liabilities: What liabilities do you need to be aware of? Are there any outstanding debts? Any fines, warranties, refunds that are current?
Financial Due Diligence
Additionally, you need to conduct financial due diligence. Examine the past 3 to 5 years of the following financial documents:
– Tax returns
– Business activity statements (BAS)
– Records of accounts receivable and payable
– Balance sheets
– Profit and loss records
– Cash flow statements
– Sales records
To determine if the record-keeping is appropriate, you should closely examine these documents. This will also inform you of any changes once you start running the business yourself.
Have further questions about purchasing an existing business or want to start a new one from scratch but don’t know where to start? Come and talk to us.
