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Deal Breaker or Deal Maker? The Importance of Due Diligence in Business Acquisitions

Undertaking due diligence is a fundamental step when purchasing a business. This meticulous process involves scrutinising the material facets of the business to grasp what is being bought fully and the associated risks. In essence, due diligence is your investigative tool to ensure that your business acquisition is sound, transparent, and, importantly, legally compliant.

Understanding the Business Structure

The structure of a business affects not just its operations but also the legal and tax implications for the buyer. 

In Australia, the two primary methods to acquire a business are a share sale and an asset sale. A share sale involves buying the company that runs the business, including all assets and liabilities. An asset sale, however, is the purchase of individual assets and liabilities, which can be selected and negotiated. The chosen method directly affects the sale process, the buyer’s legal responsibilities, and possible tax consequences.

Choosing the purchasing entity is also very important. Whether you buy individually, through a company, or a trust, each option carries different legal and tax implications. This choice should align with your long-term business goals and personal financial planning.

Relevant Searches and Investigations

Comprehensive searches are vital for verifying the business’ claims and uncovering potential issues. These searches encompass checking current ownership, existing litigations, or outstanding liabilities. 

Due diligence often requires examining records across several platforms:

ASIC Connect

Here, you can verify the company’s directors and shareholders, ensuring they match the internal records and are the ones entering into the sale agreement.

Personal Property Security Register (PPSR)

A PPSR check can disclose secured interests against the company’s assets, which may affect their value and your ability to take full ownership.

Land and Title Searches

These searches reveal interests in real property, such as mortgages, which could significantly impact the business’ value.

IP Australia

Intellectual property can be a business’ most valuable asset. Ensuring proper registration and ownership is vital to protect your interests in the business’trademarks, patents, or designs.

Litigation Searches 

Understanding any ongoing or potential litigation is critical, as this could affect the business’ value and operation.

The Sale of Business Agreement

This legally binding document should clearly articulate all terms and conditions of the sale. The agreement should include:

1. Critical commercial terms: Identifying the assets included in the sale, the agreed price, any liabilities assumed, and the takeover date.

2. Conditions precedent: Any prerequisites that need fulfilling before the sale is finalised, such as securing finance or necessary licences.

3. Non-compete clauses: Protects the business’ value by preventing the seller from starting a competing business or poaching clients and employees.

4. Intellectual property: Confirmation that the business owns its intellectual property, which is crucial for protecting your new brand or product.

    Understanding Contracts and Obligations

    When you’re in the process of purchasing a business, it’s essential to understand all the contracts that come with it. This includes ensuring you can continue relationships with suppliers and customers under the same terms as the previous owner.

    Equally important is getting to grips with the employment contracts if you plan to retain the existing team. Pay attention to any agreements they might have that could prevent them from working with competing businesses in the future.

    If the business operates from rented premises, familiarise yourself with the lease agreement. This will help you know how long you can use the space and any costs involved in maintaining or eventually leaving it.

    Taking these steps helps smooth the transition into business ownership and ensures the business can keep running as usual.

    The Foundation For a Successful Acquisition

    Due diligence is not just about ticking off a checklist. It’s an in-depth analysis that clarifies what you’re investing in, highlighting any potential legal issues or financial burdens that could affect your business in the long term. It sets the foundation for a successful acquisition by ensuring you make an informed decision backed by thorough research and legal insight. 

    Engaging with a legal professional to navigate this process is not just advisable; it’s a strategic move to protect your investment and future-proof your business.

    If you or someone you know needs help or advice regarding legal considerations and due diligence when buying a business, please contact us on 03 9592 3356, email or get in touch here.

    Deal Breaker or Deal Maker? The Importance of Due Diligence in Business Acquisitions : City Pacific Lawyers

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