View the previous blog at Buying an established business: Tricks and Traps &nash; Myths and Truths.
In this blog, we discuss "Due Diligence" – things to check and validated if you plan to purchase the practice.
Due Diligence
Due Diligence is often misunderstood. In simple terms it means verifying financial and other information, in particular that provided during any disclosure process, by obtaining verifiable, independent evidence to validate the information provided by the vendor and his/her business broker.
It can include checking sales match to the amounts reported in any financial reports and expenses against supporting documents (i.e. rent against the lease and salaries against group certificates). It may also include checking the lease and customer contracts.
3 very important caveats:
- It MUST be completed by an independent adviser or accountant with expertise in the profession or practice. The person completing the Due Diligence should have expertise in the sector and know the intricacies of the accounting and reporting standards for the type of practice you are assessing.
- Do not use the same accountant as the Vendor. Most obviously the accountant is conflicted and shouldn't take on the assignment. Generally it also means they will assume the figures are right because "we prepared them".
- The process must be transparent and independent. As the buyer, you should be able to clearly understand what was done and how the information was validated.
Due Diligence is not a general exit clause from any contract or agreement. You can only generally exit from the agreement if the Due Diligence highlights or confirms that you were misled during the disclosure process. That is, the information provided was wrong.
Other items you should check on during Due Diligence, depending on the type of practice, may include:
- Inventory: Good quality, adequate, and useful stock (as opposed to obsolete stock) which can be used to service your customers from day 1. Stock should also be consistent with that reported in the financial reports.
- Equipment and fittings: Generally it is useful to check that equipment and fittings are appropriate for the practice. For some professions and practices, equipment may need to be tested and certified.
- Legal documents: leases, insurance policies, employment contracts, and any other contracts with customers and suppliers. Also consider any contracts with franchises, marketing groups, or brands.
- Staff:
Current staff: For most practices, it is the staff and team than will make the business transferable to new owners. Staff know the systems and processes, often know the clients or patients well (and hopefully have a good relationship with them), and will assist in the transition of the business to your ownership. However, you will need to consider:- Cultural fit and whether they will be able to work with you
- Any restructuring which may improve the practice
- Leave and other entitlements
- General staff and remuneration levels
Ultimately, the decision to purchase the practice should be based on the information presented by the vendor or business broker. Due Diligence is the process of validating the information provided before you make your decision.
Seek advice before making an offer (not after) and you will enjoy the benefits of buying an established business.
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