| Depending on the size and nature of the business you | | | | debt. |
| are looking to buy, you would normally perform due | | | | Legal exposures |
| diligence in the following areas, namely: | | | | This would entail liaison with the business seller's |
| - Business and financial performance | | | | lawyers to obtain a list of legal claims and actions |
| - Legal exposures | | | | which the business is involved in. The idea here is to |
| - Technology | | | | gain an understanding of the exposures that may |
| Business and financial performance | | | | impact the business going forward. It is advisable that |
| For the most part, business sale transactions are | | | | you involve your lawyer in this process as they would |
| based on a multiple of earnings or on the net asset | | | | have the required expertise to put all the legal speak |
| position at the purchase date. Therefore, it is highly | | | | into context for you. Your lawyer should also be able |
| imperative to perform a financial due diligence on the | | | | to assist you with analyzing and evaluating the sales |
| business before you finalize the deal with the seller. | | | | agreement, in order to minimize the risk of exposures |
| Here it is important to check the following: | | | | for you. |
| Profitability (historical and forecast): Getting | | | | The types of agreements that are reviewed normally |
| comfortable with the forecast profitability based on | | | | relate to: shareholders agreements, licensing |
| historical performance is very important. | | | | agreements, royalty agreements, patent/technology |
| Assets: Analyzing accounts receivable (any problem | | | | agreements, key supplier contracts, key customer |
| debtors? Uncollectable amounts/disputes?); inventories | | | | contracts. |
| (perform a stock count; is inventory slow or fast | | | | Technology |
| moving?); fixed assets (do they exist? What state are | | | | When it comes to technology it is also important that |
| they in?); other assets (do they exist and what is their | | | | you engage a specialist to assess the systems in |
| market value?) | | | | place and their suitability for the business going |
| Liabilities: Accounts payable and other creditors | | | | forward. |
| (compare the listings provided by the seller with the | | | | In conclusion, the process of buying a business is not to |
| actual statements from the vendor and investigate | | | | be considered lightly. It is important that you get what |
| major reconciling differences to ensure that they are | | | | you are intending to pay for. |
| valid, and to assess whether there are any | | | | Importantly, there is no substitute to engaging |
| unrecorded liabilities); review bank/loan agreements, to | | | | professionals who specialize in the due diligence |
| ensure that the terms of the loans are correctly | | | | process. This will save you from much grief down the |
| recorded in the financial statements (e.g. payments | | | | track when it becomes evident that your business |
| schedules), and determine whether any of the assets | | | | evaluation process was not detailed enough and has |
| of the business are used as security/collateral for the | | | | cost you a small fortune. |