What is due diligence?
The term “due diligence” may appear to some as having some highly technical and complex meaning. However, in simple terms all the phrase really means is the process by which you as a purchaser (of a business, say a franchise business) are satisfied that:
- The vendor (seller) has good title for the assets to be sold; and
- The anticipated price is reasonable in all the circumstances.
It involves the purchaser taking reasonable precautions and care to ensure that the facts that are presented to you are correct and that what you (as purchaser) buy, lives up to the representations given by the owner/vendor.
So why should you undertake due diligence on a business?
Simply stated, you want to manage your risk. After all, the concept of caveat emptor or buyer beware is a concept that is very much alive in Australian business transactions.
Fortunately though, when dealing with franchising, franchisors are regulated by the Franchising Code of Conduct, which arises out of Commonwealth Government law. This law is applicable Australia wide.
What about outside franchising; should you simply rely on what the vendor tells you, even if it is in writing in a contract? It is never a good substitute to simply rely on the warranties provided by the vendor in the contract itself, as there may be limits on the warranty claims made. There may also be time limits applicable to any claim. Further still, the vendor may be of only very limited assets and those warranties then will be of limited use!
What if I am the Seller? How is due diligence relevant to me?
As a seller of a business, (i.e. the vendor) your due diligence needs to ensure that what you tell any prospective purchaser is accurate and will not fall foul of laws that prohibit misleading and deceptive conduct. Silence can also be misleading in some circumstances!
As a Buyer, what should I consider in my due diligence?
As the purchaser, your legal advisor should consider matters such as:
- Who is the vendor? Identify them fully.
- What has been the history of the Vendor? Where the Vendor is a company, ASIC can help here.
- What property (for example real estate), does the vendor own?
- Is there an asset register provided to you?
- What are the interests of third parties?
- What licences are required to run the business?
- What contracts are relevant? What contracts do you wish to now be assigned to?
- What intellectual property does the business own? (There can be numerous considerations here)
There are many other considerations here when properly undertaking a due diligence of the proposed business. After all, it is worthwhile being safe than sorry! Contact us to find out more or to arrange a consultation with an experienced property lawyer in Sydney.
There may be many other considerations and this is not meant as an exhaustive list. This is not intended to act as legal advice and is merely provided as general assistance and not otherwise and should not be relied upon, as every circumstance is unique in nature.