Buying a business normally involves a substantial amount of due diligence by the buyer on the target business.  Before committing to the transaction, the buyer will want to ensure that it knows what it is buying, including what obligations it is assuming, the nature and extent of the target businesses contingent liabilities, problematic contracts, litigation risks, and intellectual property issues.  

As such, it is important for a seller to have all of their business records and documentation up to date, so that a buyer can obtain a good understanding of the business and to minimise the risk of a buyer undervaluing the business or not proceeding with the acquisition.

In our experience, the following are a few key matters that buyers don’t want to see when they are undertaking due diligence:

• Corporate registers not up to date:  This could reflect that the rest of the business documents and records are inaccurate and unreliable. If the register of members is not accurate and up to date, it may be difficult to prove who the owners/sellers are (in a share sale transaction).
• Business assets owned by numerous entities:  The buyer could be concerned that it may not be purchasing all of the assets required for the business.  The buyer may also need to expend time and costs to restructure the business and its assets after the transaction – the buyer may take this into consideration and reduce the purchase price.
• Numerous registrations on the Personal Property Securities Register:  This could ring alarm bells that the business is relying too heavily on credit.  The release of registrations on the PPSR can be a time-consuming process and often causes delays in completion.
• Intellectual property that is essential to the business is not owned by the seller:  The buyer could be concerned that it may not be able to acquire or use the intellectual property required for the business.  The buyer is likely to require the acquisition of, or right to use, the intellectual property as a condition precedent to completion.
• Lack of contracts or expired contracts:  The buyer could be concerned that the relationships with major customers and suppliers may end after the sale.  This may create uncertainty as to whether the business has in place all of the contracts needed for its ongoing operation, and its continued revenue or supply (as the case may be).
• Contracts with onerous assignment or change of control consent provisions:  This could mean that the third party may not consent to the sale.  This is particularly important for agreements with major customers and suppliers.
• Salaries, employee entitlements and superannuation payments are not up to date:  There could be a risk of potential action by employees for unpaid salary and entitlements. This could reflect that the business has not been managed properly, and that there could be other hidden liabilities.
• Leases that have expired or are about to expire:  If a premises is required for the business and the lease has expired or is about to expire, the buyer could be concerned that it may not be able to continue to use the premises after completion. This could also reflect that the business has not been managed properly.
• Litigation that is on foot or threatened:  The buyer could be concerned that the business may be exposed to unknown liabilities or liabilities of uncertain value, as well as potential damage to its reputation or goodwill.

Whether the above are critical to a buyer will depend on the nature of your business, the purchase price, and the risk appetite of the buyer.  Many of the above items can also be corrected or managed before you proceed to offer your business for sale. 

If you are a business owner who is considering selling your business and you are concerned about whether there are any issues or gaps with your records and documentation, you may consider arranging a legal audit of your business prior to it being offered for sale.  If a legal audit is of interest, please get in touch with one of the Sierra Legal team.