Planning on buying a business but don’t know if it’s the right decision?
It is extremely important to collect as much data related to the business, and possibly, the owner, before signing on the dotted line.
Below is a checklist of data and documents that you should review as part of your due diligence (investigation) process.
Financial Information
This is where the rubber meets the road. How is the business performing financially?
Make sure to audit the financial statements of the business for the last three years. It’s worth noting that many small business owners optimise their financial statements to minimise their tax liability. The other party should be ready to explain everything in detail including cash flow. Set up a meeting between your accountant and the seller’s accountant – it never hurts to have an expert review everything.
Documents you should review include:
Credit report
Tax returns
All existing liabilities and debts
Gross profit margins
All overheads of running the business
Inventory of all assets and their total value
Income statements, balance sheets, cash flow statements, accounts payable and receivable
Corporate Documents
Make sure to review the company’s corporate documents such as the Company’s Constitution, Certificate of Incorporation, Company Status, information on directors, stakeholders, and more. It is also often a good idea to do a search for the company on the Personal Property and Securities Register, which may reveal important information about the company’s creditors and credit position.
Other documents you’ll need include a Certificate of Good Standing and the organizational chart documenting governing groups and executive committees.
Note: The nomenclature of business structure varies from one business to another. An experienced business broker would know how to navigate complex business structures for business transactions.
Verify all Contracts
You’ll need to review any contracts and partnerships that the business has with other companies. This is important because the business may have existing lines of credit, equipment leases, property leases, indentures, and loan agreements. Make sure to learn all there is to know about their obligations and agreements because you may have to comply with them as the new business owner.
Here is a list of documents you should explore:
Sales agreements and subscription agreements
Closing transcripts from mergers and acquisitions
Mortgages and collateral pledges
Company purchase orders and invoices
Non-disclosure and non-compete agreements
Stock purchase agreements
Loan agreements and lines of credit
All of the company’s property and equipment leases (this is often a large expense for companies and can potentially run for a very long time)
Intellectual Property Documents
Intellectual property includes designs and brand names. The company will also have a logo that may be important to the bottom line. Make sure to ask the seller if they are willing to sell intellectual properties. You should be able to keep important assets such as social media pages, websites, phone numbers, and email addresses.
Although most SMEs ( Small to Medium size businesses) in New Zealand do not have patents, trademarks, etc, it would be good to investigate in case there are any.
Here are the documents you’ll need to review:
Patent clearance documents if any.
Trademarks and trade names if any.
Copyrights if any.
Domestic and foreign patents if any.
Methods used to protect trade secrets if any.
It may be important to consult with a business broker to learn as much as possible about IP (intellectual property) owned by the business.
Employee Information
Existing employees with the business will be running the show. It would be hard to replace them if they decide to leave. This is why you should find out as much information about employees as possible, including key employees who may or may not decide to leave the company after it’s sold.
Key documents you should review include
Employee contracts
Independent contracts
Employee roster
Employee benefits
HR policies
A thorough due diligence investigation is the key to deciding whether a business is worth purchasing or not. And if so, how it should be purchased. For example, where a company has been poorly managed and may be on the hook for a number of past issues (for whatever reason), it may not be such a good idea to buy the shares in that company and effectively take over all of the issues. Rather, it may be a better idea to just purchase the assets of that company.
Consider working with an experienced business broker and other professionals, such as a commercial lawyer and an experienced accountant, to learn as much as possible about the business before you decide whether you should (and if so, how you should) buy it.
In terms of commercial lawyers, I suggest Josh Muir, Director at Lockhart Legal. You can contact him on Josh@lockhartlegal.co.nz or on 021 169 3837.
For an accountant for your Financial Due Diligence Process, you can contact John Packham at John Packham Chartered Accountants via 021 074 0906 or john1@jpca.org.nz
Warm regards
Serdar Kabul
Business Broker at LINK Business