Article: Commercial
The Process of Due Diligence, Settlement and handover by Anna Collard
Due Diligence
The signing of the Sale and Purchase Agreement does not mean that a business is sold. The buyer will want to verify the information supplied and review any additional information not previously made available due to commercial sensitivity. The time frame of the due diligence process that a buyer requests will often depend on the complexity of the business. A buyer can terminate an agreement for a number of reasons during the due diligence process, but this is less likely to occur if the information memorandum is explicit and accurate.
Items a purchaser may want to cover under due diligence:
• Products and supply lists
• Customer lists
• Supplier lists
• Plant and equipment lists
• Plant or equipment leases
• Computer programmes
• Building leases
• Supply agreements
• Distribution agreements
• Franchise of agency agreements
• Copyright or license agreements
• Local authority consents/zoning approvals
• Any pending legal actions
• Employment agreements
• Staff schedules/roster
• Insurance policies and claims history
• Financial
• Profit and loss accounts 2-3 years
• Monthly sales figures
• Year to date sale figures
• GST returns
• Aged debtors and creditors
• Staffing and payroll
• Stock values and quantities
• Work in progress estimates
• Any new product development
• Budgets and forecasts
• Settlement and handover
After receiving written confirmation that the agreement is unconditional, the sale is official and both parties must now complete the transaction. Then both parties will proceed to finalise the details required for settlement to take place on the specified date.
The deposit being held in the Trust Account can be paid to the vendor after the funds have been in the Trust Account for a minimum of ten days – this is also the time that the business broker will deduct his fees. In the time between the agreement being declared unconditional and the settlement date, both parties will need to finalise the following issues.
Stock Take
The Sale and Purchase Agreement will nominate a stock value along with a percentage stock variance figure. This figure reflects the movement in stock values depending on seasonal adjustments, shipping or manufacturing cycles. Stock values are arrived at by calculating the historical cost of purchased stock and in the case of a manufacturing company, the value of the work in progress. A physical stock take will be completed with both parties present just prior to settlement to enable a final stock figure to be arrived at for settlement.
Plant and Equipment
The purchaser will want to inspect the plant and equipment as detailed in the agreement to ensure it is in good working condition. If any plant or equipment is damaged or faulty it is the responsibility of the seller to have it repaired or replaced, otherwise its value may be deducted from the plant value.
Period of Assistance
The Sale and Purchase Agreement will stipulate the period of time you have agreed to spend immediately after settlement assisting the new owner. Depending on the complexity of the business, this is normally up to four weeks and may be full-time for the first two weeks and part-time thereafter. If any additional assistance is required beyond that period, it is normally negotiated at a pre-agreed hourly rate.
Post Sale Checklist
• Advise employees immediately of new ownership
• Advise suppliers, customers and other appropriate parties
• Assist in training
• Organise Stock-Take
• Prepare for possession and settlement dates
• Locks/security codes
• Confirm transfer of power, phone, eftpos
• Transfer ownership of domain names
• And last but not least… Chill the Champagne!
Bibliography: “The authority on selling business” - LINK Business Brokers Ltd MREINZ
