January 3, 2020

Due diligence guide for a business purchase before you engage a lawyer

Business purchase due diligence guide - before you engage a lawyer

3 January 2020

You’ll likely talk to a business seller about key sale terms before you get a legal opinion or help with formal legal documents for a business purchase.

Below is a guide for items you can discuss with the seller before you engage a lawyer. 

First, before you start discussions, consider a non binding disclaimer like the sample below. 

Non binding terms

In written negotiations, you can use the words "both parties do not intend for these terms or statements to be legally binding until they have been incorporated into a formal legal document."

Sale terms

Sale terms you can check include: 

Inventory

You may check whether the sale will include inventory, the portion of the purchase price that relates to inventory

Intellectual property 

You'll want to check which intellectual property will  be included, this may include the business name, logo, signage, website and content, and social media accounts and their content.

Seller handover 

You can request a handover before the completion date (the day the key changes hands and full payment is made for the business). 

Non compete 

You’ll want to check the intentions of the seller. Do they intend to work in a similar business close by? You may benefit from having the seller agree to a non compete.

Finances

You’ll want to make sure the business is financially sound. 

Now you may of course have an accountant help you with this task and while this is not financial advice, you may request these items from the seller:

  • 3 or 5 years worth of financial records such as a profit and loss, balance sheet and cash flow statement
  • Budgets, forecasts including sales projections
  • Reconciliation of the contracts to the financials - i.e. check if you can see the amounts in the contracts have been paid to those parties in the financials.

Contracts

Contracts may include supplier contracts, employee and contractor agreements and possibly a lease.

The contracts will give you an idea of the business's liabilities, stakeholders, future financial commitments and the seller’s compliance with those contract terms and applicable laws e.g. minimum wage requirements.

Can the contracts be transferred or do they need to be re-negotiated and will you get the same deal?

Do you have questions or comments about due diligence tasks for a business purchase? Be sure to leave them below. 


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About the author 

Vivian Michael

As founder and lawyer at Michael Law Group, CPA and owner of a business consultancy, Vivian is well-positioned to advise Australia's top entrepreneurs. Entrepreneurs benefit from Vivian's commercially focussed legal advice, business experience, and commitment to deliver the best quality business legal services to entrepreneurs.

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