What is Due Diligence?
Once you decide to buy a business you need to obtain as much information about the business and purchase as you can. As a purchaser you will want some form of certainty that the business you are buying is in the condition it has been represented to by the vendor. This process is called due diligence.
Remember due diligence includes considering both financial and non-financial elements of the business. A good due diligence checklist can provide some assurance for you when buying a business.
A typical checklist might include:
- Copies of the last three years of financial statements including profit and loss and balance sheet;
- Up to date management accounts for the year to date;
- Copies of tax returns for the last three years including all schedules;
- List of plant and equipment, fixtures and fittings including depreciation schedule;
- List of any stock expected to be sold with the business including any valuation documentation on same;
- Copies of any lease/hire purchase documentation for any assets under finance;
- Copy of aged debtors ledger;
- Copy of aged creditors ledger;
- Schedule of sales by customer for year to date;
- Copy of lease agreement if premises are leased;
- If a franchise, ask the vendor for a copy of the franchise disclosure statement;
- Copies of any employee records including leave entitlements;
- Details of insurance policies (Eg WorkCover) and dates of cover; and
- Any industrial awards or enterprise bargaining agreements in place applicable to employees.
Remember this list is by no means exhaustive and buyers should always obtain independent professional advice when considering your due diligence.
What are the costs?
There are really two costs incurred during due diligence.
Physical costs – these are those costs paid to professional advisors. It should be expected, as very general rule, that due diligence costs approximate 2-5% of the total purchase cost of the business.
Soft costs – this is essentially, your time. Buying a business is not easy! You should expect to invest significant time into the transaction to ensure you are comfortable with the purchase.