14 August, 2020 / IN Audit & assurance / by Paul Quealey
In these time of economic uncertainty, we traditionally see two types of business operators – the conservative and the opportunistic:
- Conservative and protective – focused on reducing expense, conserving cash and ensuring the business is in the best position to see through the times of uncertainty; or
- Opportunistic and growth-focused – identifying the opportunities to expand their business or purchase a new business venture.
Warren Buffet has always had one mantra when considering any investment in business – buy low and sell high. With the most common ‘low’ being in times of economic uncertainty, many are seeing the current economic landscape as an opportune time to identify a next investment or enterprise.
Over the past four months, we have seen an increase in the number of new and existing clients reviewing the marketplace to identify business opportunities to complement their own operations, or to identify an opportunity to start or diversify their business into new markets.
As business advisers, our role is to ensure our clients are making decisions that are in their best interests, both personally and professionally.
At times, our clients’ enthusiasm about the opportunity in front of them can be difficult to manage. However, we stress that with any purchase, thorough and risk-based due diligence is mandatory. This due diligence is important for any purchase type, be that of a plant, equipment and goodwill purchase through to a share purchase.
Recent client examples illustrate the value and importance of an expert risk-based due diligence.
A Recent Client Example
Our client was looking to purchase the plant, equipment and goodwill of an established business. The business is a well-respected operator in its industry, with strong sales and financial performance. At a chance discussion however, just prior to our client putting an offer forward for the business, we stressed the need for some form a due diligence on the purchase.
Our resulting review of the underlying financial data identified that over 90% of the business’s sales were concentrated with one customer. On further analysis, it was identified the supply contract with this customer was attached solely to the company that currently ran the business. In other words, the supply contract did not allow a transfer of the supplier’s rights as part of a transfer of shares/ownership in the company without the supplier’s express permission, and this also constituted a potential contract termination event.
Without the right due diligence, the business could have been purchased without its most important asset – the major customer responsible for 90% of sales.
Another Recent Client Example
Our client was looking to purchase a distressed company to compliment and expand their current operations.
Our due diligence procedures identified that the distressed company had been a party to a processing and supply contract with a customer. The fulfilment of this contract had not been able to be completed for a 12 month period. Under the terms of the contract, the customer held the right to financial compensation for the failure to fulfil the contract for the at least 5 years after the cessation of the contract.
While no claim for losses had been made at the time of the due diligence, the exposure to a future claim (which was estimated to potentially be in the millions of dollars) was an unacceptable risk for our client. As a result, a condition of purchase was included in the contract providing for an indemnity and release from the third party customer to mitigate the identified risk.
While the pessimists will say anything that appears too good to be true often is, the opportunistic and growth-focused entrepreneurs will always see the opportunities. In either case, risk-focused due diligence can assist in ensuring that only the right opportunities are invested in.
If we can assist you with due diligence in relation to a business purchase or other investment, please contact us below.