The Nature of the Business and Proposed Transaction and its Impact on Due Diligence

As part of any due diligence process, it is vital that potential acquirers seek to understand fully what the business or company does, how it does it and why it is for sale. Below we outline pertinent considerations to be made in this regard.

WHY IS THE BUSINESS FOR SALE?

It is vital during due diligence to ascertain the vendor’s reasons for selling the business or company.

Typically, investigations of this nature are conducted by speaking with and asking questions of the business owners or company shareholders.

Sometimes as part of these investigations, you may become aware that based on the reasons for the sale, that the business may not represent the sound acquisition opportunity that you first envisaged. If this occurs, you may wish to reconsider your appetite for completing the transaction or maybe re-negotiate key transaction terms.

HAVE THE SHAREHOLDERS TRIED TO SELL BEFORE?

It is important to know the history of any previous attempts by the vendors to sell the business in the past. 

We recommend conducting research into this matter. Further, it is often prudent to ask questions of the vendor like: 

  • “How long has the business been on the market for?”
  • “Have you had other discussions about selling the business in the past?”
  • “Why did you not accept previous offers to acquire the business?”

In our experience, if the business has been unsuccessfully marketed for sale in the past this can indicate issues such as a lack of buyer demand for the business, problems with the business and may indicate that the vendors have unreasonable price expectations. These problems may indicate that the transaction may not be a commercially sensible one to complete.

HAVE PREVIOUS TRANSACTIONS OCCURRED BETWEEN SHAREHOLDERS OR OWNERS?

We find it valuable to understand the nature of any transactions that have taken place historically between owners of the business or company. In other words, to understand circumstances in the past when owners of the company have sold their shares or interests to other owners of the company or third parties.

In conducting these investigations, we generally review company shareholder registers, including internal records of the company and records lodged with regulatory authorities. Further, we find it important that these investigations allow an understanding to be gained regarding the price and terms of any such transactions, and the reasons behind the transactions.

The nature of any such transactions may provide you with guidance on internal views regarding appropriate valuation metrics for the company or business, and can provide you with an insight into potential risk factors inherent in the asset.

WHAT DOES THE BUSINESS DO?

Understanding what the business does is an integral component of due diligence, however, despite the seeming mundaneness of this exercise, in our experience it is often one of the more intricate areas of investigation.

The way in which a business generates revenue, services their clients or customers, and the nature of their product or service offering is vital to understand.

In our experience, it is prudent to conduct thorough investigations into this space, in order to ascertain multiple factors not limited to:

  • If you, as a potential acquirer will have the skills to operate the business;
  • In order to appreciate how the business’ activities may be impacted by external factors such as competitor activities and economic factors, and;
  • In the case of strategic acquirers, to gauge the degree to which you will be able to realise cost and revenue efficiencies from the acquisition.

WHAT STRATEGIC PLANS DOES THE BUSINESS HAVE?

We recommend that potential acquirers gain an overview of the strategic plans of the subject business.

As part of this, it is our opinion that an important start is to ask for a copy of the business’ strategic plan if one is in existence. In the absence of a formal plan, we recommend meeting with the business’ management in order to understand the company’s future plans.

It is important to assess the plans in light of current and forecasted economic and industry factors. Further, for strategic acquirers, it is valuable to assess how the business’ strategic plans may impact on the integration of the acquired company into their established operations.

WHAT LOCATIONS DOES THE BUSINESS HAVE?

Physical and non-physical locations held by a business impacts directly on that business’ success, and on the risk profile of a business.

In our opinion, thorough research needs to be conducted into how this factor may impact on the viability of a transaction.

At a basic level, minimum investigations should be undertaken to assess whether, for example, a business holds the requisite licences or development approvals for their operations in particular locations.

WHAT ENTITIES OWN THE BUSINESS?

In our experience, it is important to understand the corporate structure behind a business’ operations as part of due diligence.

We recommend asking vendors for an outline of their corporate structure, and seeking a proposal from the vendors regarding how they anticipate a transaction being structured in light of the nature of their structure.

The nature of the corporate structure in place, and how this is likely to fit into the structure of a proposed transaction can present risks to acquirers. It is vital to ensure that the structure of a transaction allows a favourable (or reasonable) taxation outcome for acquirers, allows relevant licences of the business to be transferred, and strikes a balance between ensuring an easy to manage transition period post-transaction with the legal and financial risks of assuming ownership of a company or group of companies.

FIND OUT MORE

Groves & Partners are expert due diligence advisors. We have significant experience and expertise in guiding clients through all elements of due diligence when considering the purchase of a business.To find out more about how we can work with you, or to book a free, no obligation consultation contact us on 1300 892 717 (+61 2 7208 7970) or email info@groves.com.au.

Written by Stephen Groves

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