There are many important issues a vendor needs to deal with in the transfer process leading up to a business sale settlement.

The last thing anyone wants is a handover whereby business performance is negatively impacted by transfer issues not planned out ahead of time and dealt with appropriately. These issues may include:

• staff entitlements and employment contracts
• managing key customer and supplier relationships and communication
• transfer of registrations and insurances on P&E
• work in progress
• final stocktake
• premises lease transfer.

Buying a business is not an investment decision to be rushed into or made lightly.

For those of you considering buying a business, we have created the Business Buyer's Checklist.

• ensure you have a clear purchase objective 
• work out whether identified business opportunities are a good match for your skills and interests
• prompt you to take necessary steps regarding market appraisal, due diligence and financing.

In this blog we’re sharing information and case studies first presented by Watson Mangioni lawyers David McGuiness and Fleur Gibson in our eBook, How to conduct due diligence when buying a business.

Please keep in mind the material in this blog is not advice and should be regarded as a general guide only.

What is the purpose of legal due diligence?

Comments by David McGuiness and Fleur Gibson
Watson Mangioni Lawyers Pty Ltd

The purpose of legal due diligence is to enable an intending purchaser to assess the legal risks associated with either a business or a company, in order to make an informed decision as to whether they will proceed with the transaction and, if so, on what terms.

Where issues are thrown up during legal due diligence and the buyer still wishes to go ahead, they may renegotiate the purchase price they’ve initially offered and also request additional warranties from the vendor.

Due diligence is ‘the process of acquiring objective and reliable information on a … company as required, especially before a commercial acquisition’ [Macquarie Dictionary].

The over-riding purpose of due diligence is to ensure there are no nasty surprises after you buy a business.

We’ve created the following infographic to share some of our top tips for people embarking on the due diligence process.

The following video features 5 tips that will help you take a planned and measured approach to what may well be one of the biggest financial investments of your life.

They're each important in their own way, but I must admit Tip 2 – 'Have passion for the opportunity' – is a key one for me.

Owning a business can be difficult at times, but it's easier to withstand those challenges if you have a 'fire in your belly' for what you do.

Due diligence is ‘the process of acquiring objective and reliable information on a … company as required, especially before a commercial acquisition’ [Macquarie Dictionary].

At JPAbusiness we regularly undertake due diligence for business-buying clients. The process involves checking and verifying information relating to the basic operations and performance of the business our client is considering buying.

Our role is to identify risks and issues, plus any material differences between what has been represented in information previously provided on the business, and what we identify in the due diligence process.

I strongly advise anyone looking to make a substantial investment in a business to consider independent external advice, whether that comes from a business broker, business advisor or accountant, or another specialist.

That advice might be in the form of:

• providing a sounding board as you determine exactly what your own aims are in buying a business
• objective advice on whether the business or businesses you’re considering actually meet those objectives
• providing an independent view of the value of the business you’re looking to buy
• assisting you in the purchase negotiation process
• conducting the due diligence process.

However, this is where my answer gets a little tricky, because not all brokers have the same level of experience, and some offer a form of service I don’t endorse.

Buying a business is not an investment decision to be rushed into or made lightly.

For those of you considering buying a business, we have created the Business Buyer's Checklist.

• ensure you have a clear purchase objective 
• work out whether identified business opportunities are a good match for your skills and interests
• prompt you to take necessary steps regarding market appraisal, due diligence and financing.

Based on our years of business broking experience – and successfully making a match between many buyers and sellers – answering ‘yes’ to the following three questions should set you up for a successful business transaction:

1. Price – Is the price market related and does it reflect the value a willing buyer, under the circumstances of the sale transaction, will perceive as fair?
2. Facts – Are the facts on the business or opportunity clear, unambiguous and relevant to the risks, issues and opportunities the risk-taking party will likely perceive in making the purchase?

Earnouts and contingency payments are typical features of business sales in the Australian, European and US corporate markets.

In our work in Australia, we are seeing them increasingly used in the small to medium-sized enterprise (SME) market and we’re often involved in structuring these deals, either from a purchaser’s or vendor’s side.

If you are considering selling a business at the larger end of the SME market, with a longevity of orders and forward earnings, it’s important to consider the concept of earnouts and contingency payments because it will come up from interested parties.

It’s also important to recognise that earnouts as part of the purchase price have capital gains tax implications, so expert advice is essential.