Why do I Need to do Due Diligence?
Learn about the different types of due diligence and how it can be beneficial whether you’re negotiating the purchase of a new business, looking to invest, or selling an existing business.
If you have ever had to research an investment or a business venture to figure out what you are getting yourself into – you have done due diligence.
Unfortunately, that is where it ends for most business owners. But you will not be one of them. Even if you are not buying a business, performing a due diligence process on your own business can be equally if not more valuable.
Read on to find out how to maximise due diligence returns by aligning it with your objectives.
Objective 1: I buy businesses at bargain prices.
Due diligence will protect you by identifying the risks associated with a new business venture – if you know what issues are affecting the target business, a good due diligence process will give you more cards at the negotiating table!
If you are doing due diligence on a business you wish to purchase, be prepared to sign a Non-Disclosure Agreement.
Objective 2: My business will fund my lifestyle into the future.
Due diligence ensures you and your business are healthier. Conducting due diligence on your own business essentially does the buyer’s job for them. If potential investors look at your business today and would not invest in it, why should you?
Performing consistent due diligence on your business will identify any risks that may have emerged since you purchased the business. A classic example is where small businesses become over reliant on owners – once identified by due diligence, it’s time to delegate, book those flights and recharge with peace of mind!
Objective 3: I build businesses from scratch and sell them.
Due diligence keeps you focused. It prepares the business to be sold at a moment’s notice. If you find yourself being tempted to sell when performing due diligence, it might be time to consider re-igniting the passion that you had when you started on this journey.
If you do decide to sell, an effective due diligence process ensures the process is smooth. When negotiating a business for sale, it’s often what is not said. Your ability to quickly and seamlessly provide key documents to investors, will give you an edge over other businesses.
How is Due Diligence conducted?
What you look for in a due diligence process depends on your motivations. The following is by no means a comprehensive list of things to consider when conducting due diligence but provides a useful starting point:
- Do you need help understanding what you are actually buying under the sale of business contract?
- If you need to wrap up the business, will you be liable to pay rent for the remainder of the lease?
- Does the business need a government licence to operate?
- Is the business currently in court? Are the legal costs manageable?
- Are staff being paid correctly? Are there any HR liabilities such as leave entitlements?
- Does the business currently rely on any particular member of staff? Are they staying on when the business changes hands?
- A business may seem bigger than it actually is because of the assets it possesses. Will you own the key assets needed to run the business?
- If you are paying for goodwill, has the business registered their ownership of any associated intellectual property?
- Are you going to be outvoted by any majority shareholders? Will you be liable as an agent in a partnership? Who are the other owners?
- Are your contracts of employment, supply, lease contracts, etc are in writing?
Unsure where to start? Contact a LawPath consultant on 1800LAWPATH to learn more about customising legal documents, obtaining a fixed-fee quote from one our network of 600+ expert lawyers or any other legal needs.
Dominic is the CEO of Lawpath, dedicating his days to making legal easier, faster and more accessible to businesses. Dominic is a recognised thought-leader in Australian legal disruption, and was recognised as a winner of the 2015 Australian Legal Innovation Index.