Due diligence is not a formality you complete to satisfy the bank.
It is the process of testing what you have been told, before you become unconditionally committed. Done properly, it changes the price, the structure, the conditions and the protections you negotiate. Done as a box-ticking exercise, it tells you nothing you did not already believe.
An asset sale and a share sale transfer different property, rights and risks. This is not a technicality. It changes what you are actually buying.
In a share sale you acquire the company, and the company’s history comes with it, including liabilities you have not found yet. In an asset sale you pick what transfers, but you may need consents, new contracts and reissued licences to keep trading.
Settle this before you treat due diligence as complete, because it decides what you should be investigating.
Sellers assemble data rooms. Sellers decide what goes in them.
So verify rather than assume. Request source documents, run your own searches, and reconcile what the seller has told you against independent evidence. Then pay attention to what is missing. Absent documents, inconsistencies, expired information and vague answers are findings in their own right, and they should be raised in writing.
Check that ASIC, ABN and trust records match the proposed seller. Confirm the seller legally owns what is being sold.
Then work out whose approval is needed. Directors, trustees, shareholders and secured parties may all need to sign off before the transaction can complete. Finding that out a week before settlement is not a good day for anyone.
Most businesses are worth what their customer and supplier relationships are worth. Those relationships live in contracts, and contracts have exits.
Are the material contracts complete, current and enforceable? Can they be terminated on short notice? Do they require consent to assignment or on a change of control? A key customer contract that lets the customer walk when ownership changes can hollow out the valuation you agreed to.
Same question for the lease. If you cannot get an assignment or landlord consent, you may not be able to trade from the premises at all.
Employee entitlements, accrued leave, superannuation and award obligations. Tax exposures. Contingent liabilities. Registered security interests over plant and equipment, which a PPSR search will reveal and a handshake will not.
Also look for disputes and compliance history. Current or threatened claims, regulator matters, customer and employee complaints, insurance notifications. These affect reputation and future liability, and they rarely appear unprompted.
Fifteen areas across structure and value, operations and compliance, and liabilities and completion. Includes a tracker so you can mark each area reviewed, incomplete or requiring action before you go unconditional.
Due diligence that produces a report and nothing else is wasted effort.
Use what you find. Adjust the price. Require rectification before completion. Make consents conditions precedent. Negotiate warranties and indemnities that respond to the specific risks you identified, and consider retention or security where a risk cannot be eliminated.
And be careful about disclosure. A general disclosure of the data room can neutralise the warranties you negotiated, which is exactly the outcome the seller’s lawyer is hoping for.
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Work through the checklist while the deal is still conditional. If findings need to become contractual protection, call us on (02) 8201 0051. Leo Lawyers acts for purchasers on business acquisitions, due diligence and sale agreements in New South Wales and Victoria.
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