If you are looking to buy a business the term ‘due diligence’ should be familiar.
Due diligence is the process of thoroughly investigating the business to substantiate the claims made by the vendor (and broker) and ensuring that the business is sound.
Generally, you will need 5-9% of the sale price available for due diligence. For example, if the business has a sale price of $100,000 you will need between $5,000 – $9,000 for due diligence. (Remember to factor this in when figuring out whether you can afford to buy the business).
Who does the due diligence?
Your lawyer will do some due diligence work for you, usually by doing searches to make sure the business has all necessary licences, permits and approvals.
Your accountant will also help in doing due diligence, giving you tips on what information and documents to request from the seller to confirm the financial information already provided.
It is easy for a business to show a profit if they aren’t playing by the rules. For example, selling products which are banned will inflate profits above what they should be. Unless you want to risk the fine by continuing to sell the banned items, the businesses sales figures will be reduced by not selling those items.
Compliance Checklists
There are many due diligence checklists available to buy online. But the requirements for businesses vary depending upon the country and state in which the business is located.
For this reason it is recommended that a due diligence compliance review be conducted relevant to where the business is located.
Due Diligence Compliance Review
A Due Diligence Compliance Review is essential to make sure you don’t get any nasty surprises after buying the business.
The Compliance Review checks the business for compliance with regulatory rules and requirements. This information is then given to your lawyer and accountant so they can properly advise you about the legal and financial position of the business.
Very few businesses offer compliance reviews. Most of the ones that exist are run by former senior officers of government regulatory agencies.
For example, Google ‘due diligence compliance review’ and in Queensland there is only one business – Blue Mercury Consulting – which provides compliance reviews.
The cost of the compliance review will generally vary between several hundred and a couple of thousand dollars depending upon the size of the business and the complexity of the regulatory requirements it has to meet.
This cost is part of the 5-9% of the sale price that you’ve put to one side for doing due diligence.
Expending money on a compliance review is preferable to buying a business and having it shut down by a regulator, or suffering the financial and reputational costs of being prosecuted for a regulatory breach.
Blue Mercury Consulting provided compliance and risk services to small business, including due diligence compliance reviews for prospective buyers of Queensland businesses.
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