Due Diligence: The key to getting the right deal

When you are buying a business, conducting due diligence ensures you have access to important information about the business you’re buying. It’s the best way for you to assess the value of a business and the risks associated with buying it.

Through the due diligence process, you thoroughly investigate all aspects of a business for sale. You look at the its operations, financial performance, legal and tax compliance, customer contracts, intellectual property, assets and other details.  It’s usually done within a time period specified in a letter of intent, or the contract of sale.

You most often conduct due diligence after you and the seller have agreed in principle to a deal. The information you collect during due diligence is highly sensitive and confidential. The seller will want you to sign a non-disclosure agreement before you access this information.

As part of the due diligence process you should thoroughly review the business’s fixed and intangible assets. Knowing exactly what’s for sale will help you accurately assess the business. It’s a good idea to consult a professional adviser to help answer the following questions:

Fixed and Intangible Assets

• Do you know exactly what you’re buying and not buying? Are there lists of assets and have you checked them?
• If the business is a limited company, are you buying the shares or the assets? Legal advice is probably necessary if you’re buying the shares in a company.
• What is the book value, the market value and replacement value of the fixed assets? Which will you pay?
• If you’re going to buy inventory or work-in-progress, has a value been agreed on? Have you agreed on how it will be adjusted at the time of settlement, and within what limits?
• Have you decided what intangibles you want such as mailing lists, business name, exclusive rights or leases? Can they be transferred?

Stock

• Are you sure that the rate of stock turnover is in line with industry practice?
• Are you sure that the existing stock does not include slow moving items from another business?
• Has inventory been correctly valued in the Cost of Goods Sold statements?
• Has any item of inventory been sold but not shipped

Equipment

• Is the equipment in good repair? Is it efficient? Is it in danger of becoming obsolete or difficult to service? Are parts available? Could it be sold easily?
• Is depreciation claimed for the equipment and, if so, is it reasonable particularly for the price you’ll be paying? Is it calculated from an accounting or tax standpoint?
• Is any equipment leased? Do you know the terms and the cost of all equipment leases?
• Will you get ownership when equipment leases expire? What are the residual values?

There’s a lot to consider in conducting a meaningful Due Diligence exercise associated with the purchase of a supermarket.

For more information and assistance contact Mathew Hartley on 0400 412 593.

Benchmark Business Sales and Valuations