Avoiding Buyer’s Remorse - Business Purchase Due Diligence

One Shot, One Opportunity

Have you ever made a significant purchase that you later regretted? It’s not a nice feeling. Unfortunately, many buyers rush into buying a business without understanding what they are getting into, and they ultimately end up feeling a deep sense of regret after the transaction is finalised.

The best way of minimising the chance of buyer’s remorse is to conduct thorough legal and financial due diligence. However, to quote a famous rapper, you usually only get ‘one shot, one opportunity’.

What is Due Diligence?

Due diligence in the context of a business purchase transaction essentially means to make inquiries and investigations in relation to a business. It often involves requesting documents, asking questions and searching public records.

What Information Should I Request?

This will depend on the nature of the business and the purchaser’s circumstances. For example, the purchase of a software business will naturally warrant more inquiries as to intellectual property ownership, copyright and software licences, whereas the purchase of a manufacturing business will likely involve more investigation into workplace health and safety practices.

However, due diligence investigations will generally touch on the following key categories:

1. financial information – e.g. balance sheets, profit and loss statements, tax returns, payment records and details of securities and guarantees;
2. details of assets and stock - e.g. schedule of plant and equipment, investigation of whether the equipment is in good working order and licensed and warranty details;
3. intellectual property - e.g. trade marks, registered business names and patents;
4. clients - e.g. client lists, price lists, work in progress and referrer networks;
5. contracts – e.g. review of client and supplier contracts and whether contracts can be assigned;
6. lease - e.g. review of lease agreement, whether an assignment or new lease is to be entered into and pertinent obligations (such as make good provisions);
7. employees - e.g. any key personnel vital to the operation of the business, liabilities, claims or disputes;
8. permits, licences and insurances – e.g. full details of any authorisations required to operate the business;
9. nature of the business – e.g. what services are offered, what services are most profitable, and consideration of why the vendor is selling the business; and
10. other key items – every business is different. So, it is important to consider whether there are any unique nuances that justify investigation.

How Much Information Do I Need?

The nature of the due diligence process can vary significantly depending on the nature of the transaction. So, there is no one size fits all approach.

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Before or After Signing a Contract?

From a purchaser’s perspective, there should always be a due diligence period before committing unconditionally to the purchase.

In practice, we usually see two alternative approaches:

Alternative 1 – Due Diligence Before Contract

The first alternative is for the purchaser to complete their due diligence investigations before signing a contract to purchase the business. This is often viewed as a more patient approach; however sellers may resist if they feel as though the buyer is not appropriately committed to the deal.

Alternative 2  – Due Diligence After Contract

The second option is for the parties to sign a contract which is conditional upon satisfactory due diligence within a certain period. A carefully drafted due diligence condition will ensure that the agreement to purchase does not become binding until the purchaser is satisfied with the results of their due diligence. These conditions are fraught with risk for both buyer and seller, so they should be prepared with due care.

Confidential Information

Before sharing information with a buyer, sellers should ensure that an agreement is put in place to protect the confidential information that they will inevitably be provided during the due diligence process. Generally, this will be achieved by the parties signing a Confidentiality Agreement or a Heads of Agreement prior to commencing due diligence.

Conclusion

A prudent purchaser will make the most of their opportunity to conduct due diligence investigations before acquiring a business. The nature of the due diligence process will inherently vary from transaction to transaction, and your lawyer should be able to guide you about where to look and how extensively. Failing to do appropriate due diligence can result in buyer's remorse. When it comes to due diligence, buyers often only have 'one shot, one opportunity'.

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This article in no way constitutes legal advice. It is general in nature and is the opinion of the authors only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.