By Melissa Higham - 15 Mar 2013
When buying a business or shares in a company due diligence is
essential. Most people wouldn't buy a house without getting a
LIM report, doing a title search, checking building consents and
possibly obtaining a building report. Buying a business or
shares is no different. It is essential that you know what you
are buying. It is far more cost effective to carry out due
diligence than deal with a bad acquisition.
Thoroughly investigating all aspects of the business that are
material to a purchase allows you to assess the risks and
opportunities of a potential transaction prior to committing to the
purchase. This involves not only checking financial accounts,
but also ensuring there are no pending legal or employment issues,
ensuring there are no problems with major customers or suppliers,
and checking that any representations made by the vendor are
correct. If risks or liabilities are identified during the due
diligence process, you may be able to renegotiate the purchase
price or insert additional requirements into the sale and purchase
agreement.
There is a school of thought that rather than do due diligence,
you can rely on the warranties in the sale and purchase
agreement. This is, however, the ambulance at the bottom of
the cliff. Enforcing vendor warranties takes time and money
and at the end of the day, a warranty is only as good as its giver,
who may have vanished or who may not have enough money to pay
up. It is preferable to avoid the risk in the first place by
identifying it during due diligence.
Due diligence is simply a matter of good business practice. If
you are considering purchasing a business, give us a call to
discuss.
Contact
Melissa
Higham