Buying an existing business can be an attractive way to step into an established operation. The customers, systems, staff, suppliers and revenue may already be there.

But you are not simply buying what you can see.

The value of a business can depend on its financial performance, contracts, employees, lease arrangements, assets and liabilities. Some of the most important details may not become obvious until you start asking questions.

That is where due diligence comes in.

Done properly, due diligence should help you understand what you are actually buying before you commit to it.

Here are five areas worth looking at closely.

1. Does the business perform the way you think it does?

A business may look successful from the outside, but the numbers need to support the story.

Financial records can help you understand how the business has performed, where its revenue comes from and what costs are involved in keeping it running.

You should also look beyond headline turnover.

Is the business heavily dependent on one or two customers? Are there unusual expenses? Is recent performance consistent with previous years? Are there commitments or liabilities that could affect the value of what you are buying?

Your accountant will usually play an important role in reviewing the financial position. From a legal perspective, the key is making sure the agreement gives you an appropriate opportunity to investigate the business before you become committed to the purchase.

2. What exactly are you buying?

A business purchase can involve far more than a name and some equipment.

Depending on the transaction, you might be acquiring stock, plant and equipment, intellectual property, customer information, contracts, licences, goodwill or other assets used to operate the business.

It is important that the sale and purchase agreement clearly identifies what is included and what is not.

The structure of the transaction also matters. Buying the assets of a business is different from buying the shares in the company that operates it, and the legal implications can be different.

Getting the structure clear before signing helps ensure the transaction reflects what you actually intend to acquire.

3. What happens to the premises?

If the business operates from leased premises, the lease can be central to the value of what you are buying.

There is little benefit in purchasing a business that relies on a particular location if you cannot continue operating from it on workable terms.

You need to consider matters such as the remaining lease term, renewal rights, rent, outgoings and any obligations that will transfer to you.

The landlord’s involvement may also be required before the lease can be transferred or assigned.

These issues are best identified early. You do not want to discover shortly before settlement that the premises you assumed would come with the business are not as straightforward as expected.

4. What happens to the employees?

If the business has employees, their position needs to be considered as part of the transaction.

A business purchase can involve existing employment arrangements, accrued entitlements and decisions about which employees will continue with the business after settlement.

The way employees are dealt with can also depend on how the transaction itself is structured.

This is an area where buyers should understand their obligations before making commitments to staff or assuming that existing arrangements will simply continue unchanged.

Getting this right matters both legally and practically. Employees often hold much of the knowledge and customer relationships that make an established business valuable in the first place.

5. Are the important relationships actually transferable?

A business may depend heavily on arrangements with customers, suppliers, distributors, licensors or other third parties.

Those relationships can be valuable, but you should not assume every agreement will automatically transfer to a new owner.

Some contracts may require consent before they can be assigned. Others may contain change-of-control provisions or may be capable of termination on relatively short notice.

If a significant part of the purchase price is based on ongoing customer or supplier relationships, understanding how secure those relationships are can be important.

Due diligence is about knowing what you are saying yes to

Due diligence is sometimes treated as a box to tick on the way to settlement.

It should be more useful than that.

The purpose is to give you enough information to make an informed decision about the business, the purchase price and the risks you are taking on.

What you discover may confirm that the business is exactly what you expected. It may identify something that needs to be addressed before settlement. Or it may give you a reason to reconsider the transaction altogether.

None of those outcomes means the due diligence process has failed.

The point is to find out before you are committed, rather than after the business is yours.

Buying a business?

Blackhawk Law advises business owners and purchasers on business sales and purchases, commercial agreements and related legal issues. We can help you review the transaction, identify the legal considerations and guide you through the purchase process.

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This article provides general information only and does not constitute legal advice. The legal considerations will depend on the particular business, the structure of the transaction and the terms of the relevant agreements.