7 Key Areas of Due Diligence/ Buying a Business
1. Court Actions- A business involved in litigation is not, by itself, an item of concern. What matters is, the number of court cases and what the actions are. Eg, if the business is in a lot of litigation, then you need to ask why. Is it a high-risk? Similarly, you need to find out if the court actions relate to critical aspects of the business. 2. Outstanding Tax- unlodged (income or BAS) or lodged but unpaid returns, should be reviewed. You can become liable for these debts. Could also be a sign of a poorly run business. This will also inflate profit. 3. Unpaid Wages and Super- Do wages reconcile, and is super payable being cleared? This is the same reason as unpaid tax. 4. Financials- Brokers make claims to sell a business. Some will be financial statements, put together on info provided by business owner. 5. Aged Creditor Lists- Cash flow is key to any business. You need to see it actually gets paid for its services. Especially when “buying” the debts that the business has owing to it. 6. Big Revenue Deviations- Sale price is often an appropriate multiple of EBITDA (earnings before interest, tax, depreciation and amortisation) or some variation of that method. 7. Intellectual Property- If a business relies on its brand, process, or product in order to generate revenue, then what has it done to protect those things? Does it have trademarks, or patents?
