Why Due Diligence is Essential When Buying a Business or Real Estate

Marcus Procopio

Due diligence is the process of investigating a potential purchase for risks before committing to the transaction. The types of risks that are investigated under a due diligence program largely depend on the type of asset, but typically involve the following:

1. Financial and tax.

2. Legal.

3. Human resources.

4. Health and safety.
   

When buying a new business or piece of land, most people know to get financial advice. However, people are often put off by the cost of getting legal and other forms of advice - which can turn out to be far more costly in the long run.

On multiple occasions, I have come across clients who have overlooked getting legal advice - before being blindsided by major road or utility works being commenced right outside the front door of their business shortly after settlement. In some cases, a challenge to be profitable was converted into a challenge just to break even. 

Here are some key risks to consider when buying a small business or real estate:

1. How much time is left under the lease? Is it enough? Too much?

2. When is the next market rent review due? How will it affect you? 

3. Can the seller set up a competing business after sale?

4. Is there enough security in place?

5. Are there any major public works coming up?

6. Are you buying assets or shares? What will be the difference to you?

7. Is the seller currently embroiled in litigation which could threaten the survival of the business?

8. Should you be concerned about native title issues?

9. Are there any restrictions on developing land the way you may have in mind?

10. Is a formal valuation needed?
    

When buying a business, partner with some financial, legal and business advisers - and get the right advice. It will almost always save you time, stress and money.