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Help, I’m buying a business: Due diligence

Part 2 of 5

By Annabelle Yap DE Property and Commercial Lawyer.

One of the most pivotal considerations when purchasing a business is to conduct your due diligence before you sign the contract. When *Ally considered purchasing a business earlier this year, we conducted a range of searches, including but not limited to any security interests registered on the business name and the vendor’s company.

PPSR Searches – A security interest is an interest in personal property that secures payment of a debt or other obligations (regardless of the form of transaction) that can be registered on the Personal Property Securities Register (PPSR). In this instance, our searches revealed that there were more than a dozen security interests registered on the vendor’s company by the landlord, wine suppliers, cake suppliers, coffee machine company, amongst many. We assisted Ally to ascertain if these security interests were in fact debts related to the business and if they had to be discharged at settlement. If a PPSR search was not conducted, Ally may have operated the business with continuing debts.

Trademark search – We conducted a search to ensure that the trademark of the business was registered and transferable to Ally at settlement.

Bankruptcy search – We conducted a bankruptcy search on each Director of the vendor company to determine if they were bankrupt.

Company search – As the vendor was a company entity, we searched the company on Australian Securities and Investments Commission (ASIC) to ensure that the company is the correct owner of the assets.

Litigation –  Was there any court proceedings initiated against the business that Ally was purchasing? We conducted a thorough search to ensure that the business was not being sued.

Material Contracts – Further, we also assisted Ally to review the material contracts, licences, registrations and agreements related to the business, including but not limited to:

  • Business registration certificates
  • Liquor licence certificate
  • Food registration
  • Employment agreements
  • Supplier and distribution agreements
  • Licence Agreements

As Ally had never purchased a business before, she was surprised to know that the vendor has entered into various contracts with suppliers on terms not as favourable and those terms had to be renegotiated.

GST – As Ally purchased the business together with a lease, we advised that the sale was one of ‘going concern’ and she did not have the pay any additional GST on top of the purchase price.

Lease – It is critical to have the lease reviewed beforehand prior to taking over the lease of the business premises. During our review of the lease, we advised Ally that the landlord had included a demolition clause, which formed a major ‘make or break’ moment for Ally if she wanted to continue to purchase the business.

Plant and Equipment – We advised Ally to check if the plant and equipment are in working order.

These are only some of the due diligence investigations that we assisted Ally with during her course of purchase. Please note that this list is not exhaustive and varies depending on the type of business one is purchasing. Contact us about the due diligence process and we will be happy to assist you with your next purchase.

 

*Please note name has been changed for privacy reasons.