Articles > Small Business

Due Diligence on a Business Purchase

May 7, 2021   Liv ChumPhilip Evangelou

Due diligence is the process of gathering as much information about a business as possible. As a result, obtaining the certain key documents will assist in the process of due diligence as these documents provide information that is essential to prospective buyers and their advisor’s understanding of the business. This is because these documents will enable prospective buyers to identify and mitigate relevant risks associated with purchasing the business. 

When it comes to buying an existing business, there are various documents a purchaser should obtain from the seller as part of the due diligence process. Documents that you most certainly will need a copy of include:

  1. Business registration certificates, licenses and permits 
  2. Leasing agreements
  3. Employment agreements 
  4. Supplier and distribution agreements 
  5. Client agreements
  6. Insurance policies
  7. Asset list
  8. Financial statement
  1. Business registration certificates, licenses and permits
  • A business registration certificate is a certificate that allows a business to be identified as a separate legal entity
    • The provision of a business registration certificate ensures that the Australian government has validated that a business is/ has been registered to trade
  • Overlooking the licenses and permits that the current business possesses allows you to make sure that the current business is not being unlawful by failing to obtain the licenses or permits required
  • Checking the licenses or permits allows you to check if the licenses and permits are transferable 
  • This also gives you a better understanding of the permits and licenses you will need when taking over the business
  1. Leasing agreements 
  • This is a contract which states the terms and conditions involved where a lessor (party who legally owns the property) rents the property out to the lessee (renting party) 
  • Obtaining the seller’s leasing agreements enables you to determine whether the landlord is willing to transfer the lease to you or if you need to negotiate a new lease
  1. Employment agreements 
  • Refers to a contract which governs the terms and conditions of employment between the employer and employee 
  • This provides you with information such as the salary and entitlements of employees
  • Allows you to gage the costs of employment with respect to the business’s financial accounts
  1. Supplier and distribution agreements 
  • A contract setting out the terms and conditions between the supplier and the distributor to distribute products which were produced by the supplier
  • This discloses information such as whether there were any outstanding agreements between the seller and suppliers 
  1. Client agreements 
  • This is a contract that is set out between a company (seller) and its client which explains the terms and conditions that govern the provision of the company’s service 
  • By obtaining client agreements, you can determine how profitable the business is by examining the size of the business’s client base 
  • You can also determine how strong or weak the relationship between clients and the current business is 
  1. Insurance policies 
  • Insurance policy is a contract between the insurer and policyholder that outlines the terms and conditions where the policyholder agrees to pay a premium to the company. This is to make sure that they are compensated in the event of any unforeseen circumstances 
  • Obtaining insurance policy documents allows you to check that all assets are insured and insurance premiums have been paid and are up to date 
  1. Asset list 
  • You must ask the seller for documents which outline the varying types of assets which the current business possesses and what is also going to be sold. This includes:
    • Tangible assets (eg. equipment, furniture)
    • Intangible assets (eg. goodwill) 
    • Intellectual property (eg. copyrights, patents)
  • Getting a comprehensive list of the assets involved allows you to become aware of the condition of the assets and if any of the assets are going to be leased
  • This also allows you to confirm that the assets obey relevant regulations (eg. occupational health and safety regulations)
  1. Business financials
  • The examination of business financials includes:
    • Sales records and accounts receivable 
    • Tax returns 
    • Balance sheets 
    • Cash flow statements 
  • You should examine the business financials dating a few years back
  • Examining business financial records allows you to be wary of the business’s income stream, debts and liabilities and determine whether this business fits your budget

In Summary

The aforementioned documents are crucial to buying a business as through obtaining such documents, prospective buyers are able to verify that the seller actually owns the business. Furthermore, these documents assist in the due diligence process where the prospective buyer is evaluating and considering whether to buy the business. 

If you have any further questions about what documents are required when buying a business, you can get in touch with our commercial lawyers for help by calling us at 1300 337 997.

About Liv Chum

Liv ChumLiv is one of OpenLegal's paralegals. Liv is a passionate student of the law, with a real interest in the way that business and legal requirements intersect.

About Philip Evangelou

phillipPhil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.