Buying or selling a business: Is due diligence a waste of money?
Assistant Author - Emily Lucas, Legal Clerk
An alarming study undertaken by Griffith University’s Asia-Pacific Centre for Franchising Excellence has found that over 40% of new business owners (including franchisees) were unaware of what due diligence is and how it affects the consideration of a business venture.
Due diligence is the extensive appraisal of a business or franchise undertaken by a prospective buyer. A due diligence audit will reveal the following information:
- Current assets and liabilities
- Current client relationships and projects
- Current leasing arrangements
- Current and prospective litigation matters
- Current employee arrangements and contracts
- Current intangible assets the business may possess (such as goodwill and intellectual property etc).
Given the level of insight due diligence provides, it’s concerning that only 19% of Australian business owners are comfortable with the process. It is possible that due diligence is seen as an expense to the business, hence accounting for why so many Australian small business owners are hesitant to commence the process. However, small business owners should instead view the process as an investment, rather than a cost as it provides critical knowledge required to make a calculated acquisition.
Failing to audit a business deprives prospective buyers of the opportunity to consider if their purchase is good value for money, if they are equipped to combat inherent challenges faced by the business and if the business model meets their expectations.
Three things to remember about due diligence
- You’re entitled to request it – as previously stated, due diligence allows you as a buyer to make an educated investment
- Help is available – You aren’t expected to understand every piece of information due diligence provides, nor are you supposed to forecast the potential ramifications stemming from this knowledge. Professional advice is available to help you make sense of the documentation
- It’s an investment not a cost – Whilst due diligence may require your time, the advice of professionals and financial costs, the overall benefits of the process far outweigh the short term costs.
If you’re a prospective buyer and are unsure how to digest the information discovered in due diligence, or are selling and are unsure how to prepare your due diligence documents, please contact: