(Marketing Material);
important in their decision to proceed
(Assumptions); and
(Proposals).
circumstances and the limitations
mentioned below, the due diligence
exercise then becomes a task in testing
out whether:
Material are reasonably based;
Proposals, as these may be an
integral part in the decision to buy.
Exercises
term at the outset of a deal seems to
be the length of the due diligence
period. The vendor will wish to limit
this because they don't want to waste
time with a party who may not sign,
particularly if there are other potential
purchasers.
This time factor, together with cost,
leads to the need to limit the extent of a
due diligence exercise.
The process of cutting down the
exercise should be undertaken in
consultation with the client, and
documented so that the prospective
purchaser accepts that some corners are
being cut, with consequential risks.
The whole magic about the exercise
is trying to work out which corners you
can safely cut.
A review of the Marketing Material,
Assumptions and the Proposals will
ignored because:
its freehold land for another use, the
purchaser would not be concerned
with the past trading performance of
the business;
own in-house expertise e.g. much
of the Marketing Material may be
devoted to analysis of the market,
comparable sales, discussion on
capitalization rates etc. If the
purchaser is retaining a valuer, or
is sufficiently confident of their
in-house valuation expertise, this
area is covered and needs no further
external due diligence. However it is
important that the due diligence team
provides feedback to the valuer or
those looking at the issue in-house,
so that the valuation is not based on
assumptions which may be incorrect;
issue or assumption to the business
or the purchase?
an Australian Statutory Example
specific statutory provisions that
create local due diligence issues. The
following is one example, of many
found in the Australian context. Other
examples include local tax, stamp duty,
employment, zoning, privacy and land
laws.
Apart from Victoria and Western
Australia, each Australian state and
territory has implemented variants of the
model workplace, health and safety laws
developed by Safe Work Australia. These
new laws impose duties on persons
conducting business or undertakings to
ensure the health and safety of workers,
among others. One duty imposed
requires officers of a person conducting
a business or undertaking to exercise
compliant with the workplace, health
and safety laws (see for example, section
27 of the Work Health and Safety Act
2011 (NSW)). Therefore in Australian
jurisdictions where this or a similar
provision has been enacted, if the
purchaser of a business is a company,
due diligence in relation to occupational
health and safety (OHS) must be
conducted by its officers if that business
is to be carried on by the company after
completion.
While a vendor may give warranties
in relation to OHS issues up to the date
of completion, that may be insufficient to
discharge the purchaser's statutory due
diligence obligations. The laws impose
duties on the person conducting the
business or undertaking. Accordingly,
immediately on completion, a purchaser
is required to be complaint with those
laws and will be liable for any breaches.
A prudent approach would be to obtain
an expert OHS report ahead of purchase,
for the following purposes:
new procedures and controls may
need to be implemented (and seek an
adjustment to the purchase price or
warranties as appropriate);
given the OHS risks involved;
risk, so the aim of the advisor in a due
diligence exercise is not to stop the
client taking all risks. Rather, it is to
assist the client to make an informed
decision on whether to buy and, if so, on
what terms. Local legal input is essential
for this purpose.