You are considering purchasing a business so you visit your accountant for advice. The first thing your accountant asks is ‘have you undertaken a due diligence process on the business?’ You reply that you’ve looked at last years’ financial statements and are happy with the profitability so why undertake a potentially expensive due diligence process?
As the purchaser, due diligence of a business is critical. Due diligence involves much more than simply reviewing the last set of financial statements. The following highlights why due diligence should be undertaken and what the process entails.
What are the benefits?
Due diligence is an information gathering process to ensure the purchaser fully understands the risk profile of the purchase, it is essentially an exercise in risk management.
The due diligence process will allow the purchaser to:
- Prove the valuation of the business. This will usually involve reviewing the financial performance of the business for the last three to five years.
- Justify the reasons for purchasing the business.
- Learn about the business and its operations; including key agreements with customers, suppliers, employees and other commercial relationships.
- Identify all assets of the business and the accuracy of the relevant registers.
- Identify any problems or liabilities the business may have. This may include any potential future risks and how to mitigate those risks.
- Identify any licences, trademarks, registration and intellectual property.
- Ensure all tax (income, GST, FBT, payroll etc) obligations of the business have been met.
What is the process?
Due diligence basically involves a seller granting the potential buyer access to business records and financial information. The purchaser provides the vendor with a list of information to be reviewed as part of its due diligence process.
Previously the due diligence process was likely to be conducted in a physical room with the purchaser and advisors reviewing the information. Nowadays many businesses will use an electronic data room to host due diligence material. This allows information to be viewed online by multiple users at the one time. It also allows the vendor to control access to the documents as well as track who is viewing the documents.
Most of the information reviewed in the due diligence process is commercially sensitive. The parties should enter into a confidentiality agreement in respect to the information reviewed. This is necessary to protect the vendor from the purchaser using any confidential information disclosed.
The due diligence process is critical when considering a business purchase. While the due diligence process might sound daunting, your advisors from Accru will be able to guide you through the process.
If you are looking at purchasing a business, or have questions about due diligence, please contact an Accru Specialist today.