The Importance of Due Diligence

Posted on 1st November 2016 by Christabelle Harris

When considering the acquisition of a business, a thorough due diligence should be undertaken to ensure you know exactly what you are buying and any potential risks associated with the acquisition. The due diligence process allows you to ascertain the true value of the business.

The Due Diligence process is undertaken after you have expressed interest in the purchase but before a binding contract is negotiated.  However some vendors may allow you to make a conditional offer on the business subject to the business passing the due diligence. The vendor may insist you sign a non-disclosure agreement due to the confidentiality of information you will have access to.

A thorough due diligence will investigate all aspects of the business, including, but not limited to:

  • Financial performance
  • Business operations
  • Tax compliance
  • Legal compliance – Contracts, Leases, Licences
  • Key stakeholders
  • Customer contracts
  • Cash flow assessment
  • Equipment valuation and inspection

When reviewing a potential business purchase, the past financial performance needs to be reviewed in detail. We usually expect to see the last 3-5 years of financial data to ensure the reported profits are stable if not rising, and margins are consistent. The information contained in the financial reports of a business should be compared to the information reported to the Australian Taxation Office (ATO). Business Activity Statements and Income Tax Returns lodged with the ATO should contain the same reportable figures as those declared in the business’ financial statements.

Although a thorough review of the businesses financials is a critical aspect of the due diligence process, there are other factors within the business that need to be considered in conjunction. As part of the due diligence, the industry the business operates in, the main competitors and their market share need to be analysed. You also need to consider who the target customers are and the mix of current customers; for example if one customer makes up 50% of the customer base this may leave the business exposed to significant risk.

Our office specialises in the due diligence process ensuring you can comfortably ascertain the viability of a purchase and rest easy knowing you are getting what you are paying for!

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