Buying a Business - The Detailed Due Diligence
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1 November 2011 By Inam
Ali
Once the Heads of Terms have been signed,
it is time to thoroughly examine the business. This is called the
second and more detailed due diligence.
Check the accounts
- Try to get access to the audited
accounts, and do not rely on them entirely if they are more than six
months old.
- Check the size of the bad debts of the
business.
Analyse the historical information
- Check the sales growth, profit margins,
overheads and working capital (debtors, creditors, stock and
work-in-progress) of the business, and identify if there are any areas
of improvement.
- Are there any inconsistencies?
Financial projections
- Check these against the accounts and
other details you have to see if they tally up.
- Does the outlook reflect the relevant
industry of the business and the economy as a whole?
Check the assets and stocks
- What are the stock levels? If there is
a gradual increase in the levels, then this could be an indicator that
there is or will be an issue that needs further exploration.
- Check the legal ownership of all the
key assets, such as any leasehold and freehold property, equipment,
vehicles, and intellectual property of the business.
Legal steps that will be required
- Will the transfer of the business
nullify any existing contracts? If so, the relevant parties will need
to be contacted and separate negotiations and legal papers will need to
be prepared for each of them.
Carry an employee audit, if
possible
- Who are the key employees?
- Do each of the employees have the skill
required for them to carry on their function in the business?
- How do the employee pay levels compare
with the rest of the industry?
- How do the employees feel about the
change of ownership?
- Will any employees want to leave? Will
any employees have to leave?
Contact customers of the business
and ask them for their opinions on:
- their dealings with the business
generally
- what they feel are the good and bad
points about the business (this will help identify where there is room
for improvement).
Contact suppliers of the business
and ask them for their opinions on:
- their dealings with the business
generally
- do they get paid on time?
- how does the business compare its
competitors?
Complete the legal due diligence
- Is there any past or present litigation?
- Check all the contracts the business
has with third parties and identify the liabilities owed to each of
them.
If you would like assistance with
buying or selling a business, then please contact our Commercial
Department and speak to one of our solicitors who will be happy to
discuss this with you.
Inam Ali is
a Solicitor at Lawdit, specialising in Commercial and Intellectual
Property Law, and can be contacted via email: inam.ali@lawdit.co.uk
About the Author
Lawdit
Solicitors offer services and advice for litigation,
commercial contracts, Intellectual Property and IT legal agreements. We
are experts in commercial law with a heavy emphasis on Intellectual
Property, Internet and e-commerce law. Lawdit is a member of the
International Trademark Association, the Solicitors' Association of
Higher Court Advocates and we are the appointed Solicitors to the
largest webdesign association in the world, the United Kingdom Website
Designers Association.
