Due Diligence For A Business Purchase: Part 1

If you are considering buying a business in the UK, then before signing the business purchase contract, it is strongly recommended that you obtain as much information as possible about the business to make an informed choice before committing yourself.

Detailed information about the business can be sensitive. It may therefore be required that you sign a confidentiality or non-disclosure agreement before the seller of the business divulges the information. You may also need to prove you are a serious buyer, by providing evidence of funding the purchase and information about yourself.

Once an initial (and informal) offer has been accepted by the buyer, it is time to start the due diligence exercise about the business, including its financial situation, the assets, stock, goodwill, employees, any major customers/contracts, and the IT and other technology that will come with the business.

I will look at the various points to consider, in two parts, this being first.

The Assets

You may choose to buy the whole business or only certain assets of the business. Either way, there are several issues that will need to be considered. The following is a non-exhaustive list:

 - Does the business own all the assets being purchased? Certain assets may be leased by the business, so it’s important that you identify these.

 - Are there warranties and guarantees for the larger and more expensive pieces of equipment?

 - Are there any intellectual property rights with the sale? If so, then are they adequately protected and registered?

 - Are there any regular suppliers and customers used by the business?

 - What are the values of the asset items?

The Financial Situation

Firstly, if the business is registered at Companies House then you could obtain copies of the company’s accounts for a small fee.

Other points to consider are:

 - Look at the original business plan – this will reveal the original financial plan that was in place at the start of the business and indicate if there are any loans that need to be paid off.

 - Look at the documentation regarding outstanding loans and debts and get your accountant to look at any financial details.

Please see the second Part for more points to consider when buying a business.

If you would like assistance in purchasing or selling a business, then please contact our Commercial department and speak to one of our team who will be happy to guide you and assist you.

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