If you’re thinking of buying a business you have probably heard about the term ‘due diligence’.

Due diligence is a process that allows business purchasers to conduct research and checks on a business before formally signing a Business Sale Agreement

It is very important to conduct due diligence on a business before you purchase it.

This is because you must ensure that there aren’t any hidden details about the business that may be detrimental to you once you take on the business.

What Does Due Diligence Involve?

Legal Due Diligence involves completing research which reveals all the facts about a business, including its structure and operation.

This includes both its benefits and liabilities. 

It’s important to look out for sellers who don’t disclose important information like the reason for the sale, leases, licences, permits, and staff.

Generally, due diligence involves 3 main types of research on a business: 

  1. Accounting
  2. Intellectual property
  3. General business. 

Under these 3 categories, there are some key things to be aware of. These include: 

  • Pending litigation
  • Ongoing debts 
  • Negative customer reviews and complaints
  • Overstating of cash trading 
  • Whether the business has dropped the sale of their products and services to show larger gross sales

It’s essential to be aware of these things before signing a Business Sale Agreement. You would not want to have to deal with the shortcomings of the business once you take it on. 

Why Should I Conduct Due Diligence?

Throughout the due diligence process, you will come to understand the benefits and risks of buying the business fully before you commit to the purchase. 

Think of it like buying a car: you’d want to make sure you had an independent mechanic to inspect whether the car works before you purchase it.

It’s always a good idea to conduct due diligence as early as possible. This is because you can’t hold the seller responsible later if you didn’t check these things yourself. 

If you uncover some potential liabilities when conducting due diligence, these can be used as a tool during discussions with the seller. You may be able to negotiate to reduce the purchasing price with the seller if you’re willing to take these liabilities with the business. 

To learn more about your rights during the business sale process and at what stage you can pull out, check out this article we’ve written. 

How Do I Conduct Due Diligence?

Legal due diligence can be a complicated and lengthy process depending on the type of business you are purchasing. 

If you’re looking for an extensive background check on the business, it is important to talk to experts in the field. They will have the necessary experience to ensure you are aware of all the facts about the business. 

Businesses have many facets that are involved in the course of them conducting business. So, generally, financial and legal experts are best placed to give you advice on what things to check.

A good lawyer will also ensure you are aware of all the aspects of the business, so you can make an informed decision before committing to the purchase. 

What To Take Away…

Conducting legal due diligence is an essential step you must take before signing a Business Sale Agreement.

If you’re thinking of purchasing a business and need some assistance with figuring out where to start and how to conduct legal due diligence, our expert lawyers are here to help you. We can also guide you through other aspects of the business purchase process.  

Our experienced team can be contacted on 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations consult.

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