Published on 28/09/2017 by Any Business.Com.Au

Due diligence questions when buying a business

Due diligence is vital once you decide to buy a business. In the end you should know its prospects, competitors and the market.

Here are 7 key steps:

Step 1: Check financial statements

• Check balance sheets, profit and loss statements annual reports and any cash flow statements for at least the past three years
• If the statements aren't audited, you'll need to verify the numbers against independent evidence, such as sales records, invoices, bank statements and loan documents
• Check profit and loss statements

Can the business generate enough money to provide you with a reasonable income and make a profit? Compare the rate of growth for profit, sales and costs.

Are there new or increased costs you should anticipate?

Check cash flow statements:

Know the accounts back to front before you buy

Are there any cash flow or debtor problems?

Are bills being paid on time?

Who are the key creditors?

Check annual reports (if it's a company)

Step 2: Check tax records

• Check income tax returns for the previous three years to give you an idea of the business' profitability
• Check business activity statements (BAS). Reconcile the business' taxable income and profits with its financial statements
• Check payroll tax records (if applicable). The business' PAYG (pay-as-you-go income tax), GST and other tax obligations, such as payroll tax, should be up to date
• Check stamp duty records (if applicable). Will the purchase of the business be GST free (if you are buying an ongoing business) and how much stamp duty will have to pay?

Step 3: Check the assets

• Inspect and verify that plant, equipment, fixtures and fittings are in good working order
• Ask for an asset list and check off physical items against it
• Do a stock valuation or stocktake to assess the amount of stock on hand and its value as at the settlement date
• Get insurance details to check assets are insured until settlement of purchase
• If assets are leased, get copies of the leases

Step 4: Know your customers and suppliers

• Get a list or database of key customers, find out how loyal they are and which ones are key to the business
• Check sales contracts to see if customers are locked in and if future business is guaranteed
• Check if any major contracts are about to expire
• Get details of suppliers and find out if they'll continue to trade with you, if they pay their bills on time and if there are expected cost increases

Step 5: Find out why the owner is selling

• Investigate the reasons for the sale:
• Is the business badly managed?
• Is the owner is offloading it because it isn't making money or its prospects are poor?
• How long has the owner operated the business?
• How long has it been on the market?
• How many offers have been made?
• Ask customers, suppliers and competitors for information about the business and its problems
• Check for hidden problems

Step 6: Check legal rights and obligations

• Review government regulations that apply to the business and whether it has the relevant permits and licenses it needs to operate
• Check worker entitlements that need to be made, including leave entitlements or compulsory superannuation
• Check whether worker's compensation premiums are up to date
• Check if intellectual property is protected through licenses, patents, trademarks and registrations and if these rights will be passed on with the sale
• Check the lease and any agreements binding the business and ask for a copy:
• Is there a right to renew on the lease and can you exercise that option?
• If there isn't a right to renew, could you find another suitable location?

If you are buying a company:

• Check the Australian Securities and Investments Commission (ACCC) website for company details
• The ACCC website can tell you if the business has been subject to enforcement actions
• Contact your state or territory consumer affairs agency for a record of dodgy trading
• Check the Australasian Legal Information Institute website to see if the trader has ever been taken to court

Step 7: Check out the competitive landscape

• Investigate your competitors. Look at their growth, strengths, weaknesses and threat to you. Compare profitability, earnings, prices and costs if you can
• List potential threats. Check with local council to see if new competitors planning to start up
• Research industry trends. Is the sector growing or slowing? What are the profit margins?
• Consider economic factors. If the economy slows down, how will this affect your business?

You can get information from industry associations, government departments and the Australian Bureau of Statistics or seek specialist advice from industry bodies, consultants and business brokers.

AnyBusiness.com.au

Curtis is a leading expert in the business-for-sale industry, serving as a senior content creator at anybusiness.com.au.

With a career spanning over fifteen years, Curtis has accumulated extensive knowledge in the domain of business sales, acquisitions, and valuations. His deep understanding of market dynamics and his ability to translate complex industry jargon into accessible insights make him a trusted resource for entrepreneurs and business owners looking to buy or sell businesses.

Author profile

Related articles

Fallen Interest Rates – 6 Questions from the Australian Public

11/05/2015 by punchmedia

The RBA (Reserve Bank of Australia) announced it was officially cutting interest rate to a historic low of 2.00%. This announcement was made one week ago and in the last week we have heard a flurry of questions in regards to the broadcast. Now that things have quietened down a bit, we have attempted to answer these questions in the form of an article so that both individuals and those who are looking to own a business can h...