How We Conduct Due-diligence
Our Due Diligence (DD) Team members include lawyers, accountants, technical personnel and business advisers.
A detailed DD guidelines is made available to clients prior actual due diligence is carried out. However, a brief outline is provided below:
The following are carefully reviewed:
records of accounts receivable and payable
balance sheets and tax returns including business activity statements (last 3-5 years)
profit and loss records (last 2-3 years)
cash deposit and payment records, as reconciled with the accounts
bank loans and lines or letters of credit
minutes of directors' meetings/management meetings
audit work paper files (if available)
the seller's claims about their business (e.g. their reasons for seeking investments, the business's reputation, etc.)
privacy details (e.g. of employees, trading partners, customers)
details about plant, equipment, fixtures, vehicles (are they in good working order and licensed?)
intellectual assets of the business (e.g. intellectual property, trademarks, patents)
existing contracts with clients/staff
details of the business's automated financial systems
details of credit and historical searches related to the business.
Warning signs for the Investor
Our Due diligence team is wary of businesses who:
do not disclose important information (e.g. their reasons for seeking additional investments, financial statements, licences and permits, staff contracts)
won't agree to a trial period or enough time to conduct due diligence (DD team will need at least 30 days)
won't introduce to their suppliers, landlord or estate agent
are involved in legal proceedings
are keen to close the deal quickly
have a questionable credit record and history.
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?
Are new licences required? Licences may include licences for equipment and user licences.
What is the real reason why the business is for sale or seeking investment?
Is the seller/owner being cooperative and supplying all relevant information?
Is the seller/owner 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?
Does the buyer/investor 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/owner a factor critical to the business's success to date?
What role does the seller/owner 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?
Is it possible to talk to staff privately and interview staff members without management interference before sale?
Is an adequate salary allowed for work done by the owner and their family in addition to an adequate profit margin?
The following are thoroughly checked:
What are the terms and conditions of any applicable lease agreement and the obligations and rights under such agreements?
Are there any notices with regard to health, water and sewerage, environment or other government requirements that have been served on the business and require work to be carried out?
Implications for the Investor of obligations under the intended business legal structure?
Are there any legal proceedings pending against the business or the owners/promoters?
Has the business sought legal and accounting advice on the best way to handle its finances, the purchases and their business structure?
Besides making sure that the target business is fully tax compliant, the following are also checked:
If an investor is buying an asset, at some point in the future he/she may wish to sell it. The relevant provisions of capital gains tax law must thus be looked into.
There are special capital gains tax implications if investor sells/exits a business within 12 months of purchase. These must be considered.
There may be transfer (stamp) duty implications while investing in business assets or if there's any internal trading entity restructuring (e.g. family partnership to company). These must be considered.
Are there any GST or other tax implications for the investor
Analysis of the financial records for the past 3 years, including balance sheets, profit and loss statements, tax returns, purchases and sales records and bank statements. Have the records been well kept? Do they show potential for growth? What do the profitability and liquidity ratios show?
Based on past financial results, the future cash flow and profitability of the business must be projected. Check what is the break-even point?
Check for an aged listing of accounts receivable. Adequate provision for doubtful debts must be highlighted.
Check if the business owner received any payments in advance (e.g. deposits) that they should reveal.
Will the investor have to build up his/her own accounts receivable? Work out how this will affect cash flow once Investor has invested.
Are accounts receivable sellable to a factoring agency (bank or finance company) in order to generate cash flow into the business? What would be the implications of such a move?
Sales patterns and records
Are sales records reliable? Are the total sales broken down by product line?
Are bad debts deducted from sales, or are they still shown as receivables? Is the percentage of bad debts within industry standards?
What are the sales patterns year-by-year and month-by-month? Is the pattern seasonal or related to some business cycle (e.g. home construction or other uncontrollable variable)?
Are there fluctuations in sales due to one-off sales?
Are you sure all sales figures shown are for this business, and that the seller hasn't added sales from another business?
General sales information
Is the product or service likely to maintain or improve its marketability or is it in danger of becoming over-sold, out of style or obsolete?
Can you increase sales with current resources?
What is the sales mix (the ratio of each product sold to total sales)?
Can you achieve the required sales targets?
Do you know the minimum and maximum likely sales?
Is a particular salesperson critical to success? If so, will you be able to retain that person in your employment?
Do a small percentage of clients represent a large percentage of sales?
Is the seller continuing on with another business that may have some effect on the future sales of this business?
What is unique about the business's product or service?
Are the expenses disclosed include all expenses incurred by the business?
Has the seller covered the business with the necessary insurance cover?
Have all compliance requirements (Work Health and Safety, Quality Assurance and Environmental compliance) been met and do they appear in the accounts?
Beware of the add backs, which usually include personal expenses that had been charged to the business and have been credited back for the purposes of valuing the business.
Take a hard look at the effect of increased or decreased sales on profit?
Consider the effect of inflation on sales and costs in the years to come?
Are profits adequate to warrant the risk of buying?
Warranties and refunds
Are any goods/services on warranty? If so, should you make a financial allowance for possible warranty commitments?
Will clients expect you to make refunds or warranties even in instances when you're not legally obliged to do so?