Business operations and industry environment due diligence when buying a business

When you're investigating a business you are considering buying, it's important to do a detailed review of the business's operations and industry environment as part of the due diligence process. It also involves understanding the seller's reasons for selling their business. It is a good idea to consult a professional adviser to help answer the following questions.

The business

• Is the type and size of business compatible with your interests, experience, personality and capital?
• Is the business part of a group or franchise that may restrict how it operates?
• Does the place of business have all the required permissions to perform the business functions it does? Town planning laws and work health and safety regulations are particularly important here.
• Are there any procedure manuals or quality assurance programs in place?
• Do you need new licences? Licences may include licences for equipment and user licences.

The seller

• Do you know the real reason why the business is for sale?
• Is the seller being cooperative and supplying all relevant information?
• Is the seller willing to sign an agreement to refrain from competing against you (i.e. restrictive covenant)? Legal advice is usually necessary here.
• Will the seller train and help you after you buy? If so, for how long?
• Is the seller's personal role critical to success?
• Do you have similar skills, experience and personality to the seller if it is their role you'll be replacing?
• Would there be an opportunity to work in the business for a trial period before entering into a contract?
• Is the personality of the seller a factor critical to the business's success to date?
• What role does the seller play in the day-to-day running of the business and would they be missed?

Competition

• Are prices competitive for the nature of the business?
• Are competitors gaining strength?
• Will the internet mean price-based competition from countries with lower costs?

Industry

• Is the industry in which the business operates expanding, contracting or remaining static?
• Is any deregulation likely to occur in this industry that may open the business to greater competition than it experiences now?
• How does the business rank against other businesses in the same sector?

Suppliers

• Will you be able to continue buying the products from existing suppliers?
• Have any suppliers been offering special conditions to the seller based on unwritten agreements?
• Have you checked the business's credit rating with suppliers? Will you receive an established rating or be treated as a new account?

Location

• Is the business in a good location or is this the reason why it is for sale?
• Are new developments going to be commenced or opened in a nearby location that could affect your trade?
• Are there any impending town planning changes that may affect the business?
• Are major road developments or public works going to proceed in the near future that may affect your business?
• Has a rezoning application been lodged in regard to either the intended business location or nearby locations?

Lease

• Is there a rental lease in place? Can you continue under the current lease or do you need to establish a new one?
• Have you checked the terms and conditions of any lease of premises and discussed these with your solicitor?
• Has the landlord changed recently? This could indicate matters such as an impending increase in lease payments or possible redevelopment proposals.

Staff

• Are there any contracts in place with staff?
• Are remuneration packages for staff clearly defined?
• Are staff paid the correct awards and wages, and do they expect wage increases soon?
• Which party is responsible for previously accrued entitlements to long service leave, holiday pay, sick leave, superannuation and other employee benefits?
• Has workers' compensation insurance been paid in respect of all employees?
• Do current staff require any licences? Visit ABLIS (Australian Business Licence and Information Service) for business licence applications, lodgement and payment information.
• Is it possible to talk to staff privately before sale?
• Is an adequate salary allowed for work done by the owner and their family in addition to an adequate profit margin?

Also consider...

• Assess your skills and goals to see if you are ready to start a business.
• Find out about doing business online.
• Learn about working with suppliers.
• Contact your council to check if there are likely to be changes in your business location.