What is due diligence when buying or selling a business?.

What a buyer is really doing.

A buyer wants to know as much as possible before committing, and due diligence is how they find out. It means making all reasonable enquiries about the ownership, the finances and the operation of the business so the risk can be understood and priced against the proposed sale price. What is reasonable varies with the type of business, the kind of seller and how far the buyer wishes to look.

The searches and enquiries.

The investigation usually includes a set of searches: ASIC for company status, business name registration and any irregularities, the national personal insolvency index for insolvency, the Personal Property Securities Register for security interests over the plant and equipment, IP Australia for registered trade marks, the local council for notices and any conditions or approvals affecting the business, and Land Use Victoria for the title and any encumbrances on real property. A buyer will often also ask for authority to speak with the key people around the business, employees, suppliers, customers, contractors, bankers, agents and the accountant, usually granted subject to a confidentiality agreement. Many of these searches are repeated immediately before settlement to catch anything that changed between signing and completion.

What it means for sellers.

For sellers, the lesson is to be ready, because a seller who will not assist or disclose makes a buyer wary, and wariness costs money or kills deals. If the enquiries turn up problems the buyer may seek a lower price or different terms, or require the seller to fix the issue, or walk away. If they confirm what was represented, the buyer can proceed with confidence. Our business sale and purchase service prepares sellers for due diligence and runs it for buyers.

Law referenced: Personal Property Securities Act 2009 in passing.