What is due diligence?
Due diligence is an investigation which is conducted by a third party on behalf of a buyer who is interested either entering into a business transaction or purchasing a business or property. These searches and investigations will provide the buyer with certain information to allow them to assess the advantages and potentially the risks in proceeding with the transaction or purchase.
When should you commence the due diligence process?
This should be done as soon as possible. Best practice is that due diligence should be performed prior to entering into any contract for your purchase of a business or property. If this cannot be done before entering into a contract, it is recommended that the contract is subject to a due diligence clause which would state that the contract is conditional on the satisfaction of the due diligence investigation. The clause will also state when the due diligence condition is due and provide the buyer with the right to terminate the contract if the search results are unsatisfactory.
What should I look for?
Depending on the situation and the purpose of the investigation, the due diligence process may involve searches being performed by the buyer, its solicitor and accountant.
For a property purchase in Queensland, a buyer will usually rely on the building and pest inspection. However, if a due diligence clause is inserted in the contract, the solicitors will, if instructed by the buyer:
- The zoning of the property to ensure that, if the buyer wishes to develop or make changes to the property, the changes made would satisfy the neighbourhood plan and the property zoning.
- Body corporate records (if applicable) for the details relating to the property. This will provide information on the body corporate such as, whether any major repairs or maintenance are about to be done or whether the body corporate is struggling financially.
- Building reports and notices. This will reveal whether any works were done to the property and whether the local council’s approval was obtained. If the works were not approved by the local council and they become aware of it in the future, this may cause issues to the buyer as the local council may issue a notice to the buyer requesting the works to be rectified to satisfy the building code. Alternatively, if the buyer wishes to sell the property and the future buyers becomes aware the works were not approved by the local council, this may cause issues and hinder the sale process of the property.
For a business purchase in Queensland, it is recommended that a due diligence clause is inserted in the contract in order to provide the buyer the opportunity to conduct a full due diligence on the business. This usually includes checking the business licences, permits, any legal proceedings, any adverse findings, registrations, plans, operations, financials, lease agreements, intellectual property and, but not limited to, third party agreements.
Right to terminate – Protection for you
In the event the Contract has a due diligence condition, the buyer has conducted their due diligence during the due diligence period and is not satisfied with the search results, the buyer may terminate the contract based on unsatisfactory due diligence. The use of a due diligence clause is a better and more protective option than that of restrictive building and pest inspection clauses or set clauses. This is because it allows you at your ultimate discretion to terminate or negotiate a contract to your better advantage.
If you have any queries or require assistance with your due diligence process, please contact Stephanie Tran on (07) 3839 8011.
Article written by Stephanie Tran of our Brisbane office.