If you are thinking about buying or selling a business, you may have heard lawyers or advisors talk about “Due diligence”. But, what is it?
Due Diligence is akin to the survey process when purchasing a property. It should reassure the buyer of what they are buying, warts and all. It can then act as a conduit for negotiation on value if something unexpectedly crops up.
We think it is helpful for businesses to understand the process before getting in to “real” talks. Here is a brief checklist of what we would look for during a Due Diligence exercise:
- Know your seller and target by performing searches. For example, if it is a company take a look at Companies House at their recent filings and constitutional documents or if the seller is a sole trader or partnership are they on the bankruptcy list?
- Do they have authority to sell? Keep an eye out for agreements that restrict who can sell what and when.
- How are the finances? Request a copy of the accounts for the last 2-5 years and check for loan facilities.
- What will be sold and what will be excluded. Is there anything that could compromises ownership such as a hire purchase agreement or security being granted over the assets for a loan?
- Contracts are applicable to even the smallest of businesses. These could be terms of business or a credit arrangement with a supplier. It could be any applicable insurance policies. What contracts is the business a party to and will these obligations pass to the buyer.
- Does the business own its intellectual property such as a logo? If an individual owns the IP it may need to be assigned to the buyer.
- Real Estate. Will the buyer acquire a property as part of the purchase. If so, how will they own the real estate and will they be subject to any easements, restrictions or charges.
- Employees are assets and this means they form part of the sale in some cases. What are their terms of employment, what are they paid? Is there anyone that is key to the business that may make the purchase less valuable if they were to leave?
- Statutory Obligations. Are they meeting their statutory obligations? Examples can include whether they have enrolled in the workplace pension or have the requisite policies in place.
- Be detailed, honest and thorough in your preparation. Around 50% of potential sales fall through at the due diligence phase – try not to be one of them!
- Place yourself in the Buyer’s shoes. Think about what you would want to know if you were buying the business.
- Hope for the best but anticipate the worst. Solicitors for buyers will want to delve into the mechanics of the business to protect their client’s interests. Be ready for the hardest of questions.
- Think about your Tacit Knowledge. Tacit knowledge is information about the business that is difficult to transfer to another person as it’s the knowledge acquired over time, experience and ‘gut feeling’. Can you help the buyer to understand more about business by explaining market in the area or factors that affect the business at certain times of year?
- Be cautious. Some business owners can be so focused on finalising the sale that they can neglect their own commercial interests. Could the information you are sharing be advantageous to others? If so, is a non-disclosure agreement needed.
Buying or selling a business can be very complex. We strongly recommend instructing professional advisors to help guide you through the acquisition minefield.