Tab 1 of 5 · Checks
Checks before you buy an existing business
The checks come before any signature: business.gov.au says to gather as much information as you can on the business before you sign the contract, and that you need to independently collect and check its financial information. Business Queensland adds that this due diligence can take anywhere from a week to several months, depending on the size and complexity of the purchase.
General information, not legal, financial or tax advice on any purchase. The official places to check are business.gov.au and Business Queensland, whose guidance is written for Queensland.
What the checking is for
Business Queensland puts the purpose plainly: due diligence is about taking reasonable steps so that a buyer is “not making risky or poor decisions, paying too much or breaking any regulations or rules”. It places the job on the buyer, who is responsible for confirming the business is “as ethical, compliant and profitable as claimed”. What it turns up feeds straight into the price and the terms.
Three piles to work through
The official lists are long. Sorted into three piles, they read like this.
The figures
business.gov.au asks for three to five years of them: tax returns, business activity statements, receivables and payables, balance sheets, profit and loss, cash flow and sales records.
Business Queensland adds loans, overdrafts and other finance facilities, payroll, PAYG and super guarantee records, and audit reports where they exist.
The things
- Licences and permits: the right ones, and current?
- The lease: will the landlord transfer it, or is a new one needed?
- Plant and equipment: working order, and licensed?
- Stock: included, and in what state? Business Queensland also flags stock not fully paid for.
- Debts, refunds and warranties still running, and any debt on an asset registered on the Personal Property Securities Register.
The place and the people
Talk to existing customers, employees and neighbouring business owners, business.gov.au suggests.
Business Queensland’s research list runs from visibility, flood and fire zoning and town planning to why the owner is selling, other buyers who didn’t proceed, and transfer duty.
Business Queensland’s legal pile is worth reading in full on its page. Among other things it lists any legal proceedings, any matter under investigation by a regulator such as the ACCC, mandatory codes of practice, and whether supplier contracts can pass to a buyer without the supplier’s consent.
How the checking is run
A team
Business Queensland suggests accountants, financial advisers, lawyers and business mentors, who can spot risks a buyer may not have considered.
A confidentiality agreement
A seller may ask for a non-disclosure agreement before opening up sensitive or protected material.
A data room
A shared online space that the buyer, the seller and their advisers can all reach.
Requests for information
Formal documents, known as RFIs, that let the buyer ask the seller for specific information. The answers shape the negotiation and, later, the draft contract.
“A buyer is interested in purchasing a business with a large amount of stock in a warehouse. The records indicate stock turnover for various products is very slow, in some cases longer than a year.”
“Consequently, the buyer negotiates the removal of the older stock from the sale agreement, reducing the sale price for the business and making the warehouse space unnecessary.”
Business Queensland’s example of an RFI at work. Between the two lines, the seller explains that the stock serves older equipment still in use.
Warning signs, and the unexpected
Some signs are visible on a walk-through. Business Queensland’s examples are old, poorly kept equipment, which may mean replacement costs soon, and poor customer reviews, which may take extra resources to turn around.
Others can surface even after the checks are done. Business Queensland’s list of the unexpected to prepare for includes these three:
- delayed expenses, leaving equipment, maintenance or wages to fund straight away
- sales and cash flow figures that turn out to be inflated
- risks from the seller’s earlier actions, with no indemnity in the contract to cover them.
A contingency plan is its answer.
Promises in writing
Before the sale contract is signed, Business Queensland’s advice is to get specific warranties and indemnities from the seller. Its examples are underpaid wages or unpaid superannuation, and disputes with manufacturers or other creditors over unpaid invoices. Wages and super lead into a tab of their own: taking over staff. Where the checks touch tax, the questions move on to GST on a going concern; where they touch the name, the ABN and the licences, to registrations. The order of the whole purchase is on the home page.
When the checks find something
Timing matters here. Business Queensland notes a contract can include a due diligence period that lets the agreement be ended if it uncovers an issue that could seriously affect the business’s success, and that such a period is generally limited to 5 to 10 business days after signing. Its example is a workplace health and safety issue the seller didn’t disclose: found in time, it lets the buyer end or renegotiate the sale.
In another of its examples, the checks showed the business’s software would soon fall short of new compliance rules. The seller would not replace it before the sale, and the buyer judged the cost, time and risk too high and walked away.
Walking away before signing is one of the outcomes the checks allow. So is a lower price, a narrower sale, or a promise in writing that covers what the records could not settle.