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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.
- 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.
- 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?
- 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?
- 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?
- 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?
- 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?
- 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.
- 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?