From time to time as a breeder of stud Hereford cattle I have to acquire new bulls and when viewing proposed bulls I will have an emotional leaning towards certain animals, but as this is an important business decision for our cattle farming activities that only relates to a small part of my decision-making whilst the other areas are the breed plan figures and the breeding history of particular animals, in other words, due diligence.
Now compare that to a single individual who is looking for a potential long term partner that is substantially a more emotional decision and on numerous occasions consists of no due diligence except possibly what can be found on social media, and because of the lack of due diligence, those potential long term partners often fizzle out.
I wanted to make reference to those two areas to highlight the importance of due diligence when it comes to acquiring a business.
If you are going to acquire a business, it is extremely important as a pre-condition to that acquisition that you make it subject to your accountant and your lawyer’s satisfaction with you proceeding after appropriate due diligence enquiries.
From a financial due diligence point of view, an accountant is going to want details of management accounts and statutory accounts, together with details of existing contracts, forward pipeline of income, breakdown of costs, details of historical capex, reconciliation of revenue and EBITDA and net profit between the management accounts and audited financial statements, details of trade debtors, supply arrangements and trade creditors, labour costs, employee compensation and other matters.
From a legal due diligence point of view, the lawyer is going to want to reconcile statutory records, understand capital structure and shareholding, get details of all your advisers, check ownership of real estate and peruse all leases of property used and equipment leases, look at ownership of other assets, look into all intellectual property matters, peruse material contracts, have a clear understanding of all current and threatened litigation, deal with environmental issues and all employee contracts and policies. Further, the lawyer will check compliance with superannuation requirements, GST, related party transactions and all other legal compliance matters, together with a review of existing computer systems, supplies and customers.
As you can see, due diligence is extensive but unlike that random emotional decision when it comes to choosing an individual to share time with, the use of due diligence is likely to result in a far better outcome for you as a purchaser of a business. Likewise, if you are going to sell your business, see your lawyer and your accountant first so that you become sale ready, which will save you considerable time and money.
If you need any assistance with proposed business transactions, please do not hesitate to contact Dick Mackenzie by phone or by email at dick@emlawyers.com.au.
