If you are considering purchasing a business, be sure to do your due diligence. What's that? Doing your due diligence means that you should conduct a detailed and thorough investigation of various facets of the business to make sure you have obtained enough information about the business – including its assets, liabilities, and market conditions, among other things – to let you make an informed decision about whether to buy the business.

Some things to investigate as part of the due diligence process are outlined below. This is not a complete list, but is a good start, and can give you some things to think about. Of course, different types of businesses may require additional, or less, information to be evaluated. Bottom line, to make an informed decision, you need to consider all of the relevant information.

A. Legal Status and other Formalities

• Is the company properly incorporated or organized with the state? Is that registration current?
• Is the company authorized to conduct business wherever it conducts business and has office or other locations?
• Intellectual Property – are its trademarks, service marks, business name, internet domains properly registered if needed? Are patents it uses owned by the business or properly assigned or licensed to it?
• Who are the current owners, and what are the restrictions on transfer of shares or membership interests?
• Are the corporate or LLC records current? Does a review of those identify and problems with the company?
• Is there a Buy/Sell agreement, or other Shareholders' or Members' agreement in place that controls the ability for you as a third party to acquire an interest in the company or acquire the entire company?
• Verify title/ownership for major assets. Does the company actually own its assets?
• Check for pending litigation as well as liens or judgments against the company or assets.

B. Accounting Review

• Review the company's financial statements. Do they have audited or formally reviewed statements?
• Have accounting records been maintained properly and consistently?
• Accounts payable and receivable verified?
• Review inventory levels. Are they reasonable and appropriate? Is inventory perishable? Is it obsolete?
• Tax liabilities – is company current on all liabilities? Review prior income and other tax returns.
• ERISA account review, pension review, ESOP review, as applicable.
• Liabilities to employees for vacation time, sick leave, etc.
• Have employees and contractors been properly classified as such? Any potential liability due to misclassification of employees as independent contractors?
• Market conditions of business segment. How has it been, and what is the forecast?
• Recent developments by competition, or entry into market by potential competitors.
• Review of major suppliers and major customers.
• What long-term contracts is the business a party to? What about shorter-term contracts?
• Employee/Employer relations. Are they in good order? What issues are present?
• Will key employees and management stay with a new owner? What changes might need to be made, and how would that happen?
• Would departing owners and key persons be subject to a covenant not to compete, not to solicit customers and employees, and covenant to maintain confidential information in confidence?
• Regulatory and legal environment of the business – is the business subject to any current or pending regulatory actions? What about lawsuits or claims?
• If a franchise – review the franchise agreement and speak with franchisor. Understand the terms for a transfer or assignment of the franchise, as well as key franchise terms including royalties and minimums, training, support, advertising, etc.

C. Business Review

• Market conditions of business segment. How has it been, and what is the forecast?
• Recent developments by competition, or entry into market by potential competitors.
• Review of major suppliers and major customers.
• What long-term contracts is the business a party to? What about shorter-term contracts?
• Employee/Employer relations. Are they in good order? What issues are present?
• Will key employees and management stay with a new owner? What changes might need to be made, and how would that happen?
• Would departing owners and key persons be subject to a covenant not to compete, not to solicit customers and employees, and covenant to maintain confidential information in confidence?
• Regulatory and legal environment of the business – is the business subject to any current or pending regulatory actions? What about lawsuits or claims?
• If a franchise – review the franchise agreement and speak with franchisor. Understand the terms for a transfer or assignment of the franchise, as well as key franchise terms including royalties and minimums, training, support, advertising, etc.

The Bottom Line

Buying a business can be an exciting opportunity, but it also is a serious matter. Be sure to do your homework – your due diligence – so you can make an informed decision. And be sure to consult with your key advisors, including a lawyer, a CPA/tax advisor, and other professionals as needed. Among other things to consider is whether you will actually buy another business entity (meaning you acquire the assets AND the liabilities of the business, inasmuch as you acquire the corporation or LLC), or whether you simply acquire the assets. Buyers generally prefer to just acquire the assets, so as to not take on any liabilities, but depending on the business and the proposed transaction that may not be possible or advisable.

The Beck Law Firm, LLC assists clients in buying or selling businesses. If you'd like to speak with a lawyer about business law needs, we invite you to contact us.

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