Due Diligence

What to look for when purchasing a business for sale.

What To Look For When Purchasing a Business For Sale.

For some, due diligence may be the least understood part of the business acquisition process. When looking for a new business to buy, you should comprehensively understand the inner-workings of the company that you are looking to purchase. Frequently, many do it yourself purchasers have very little information about the business they are attempting to buy. Some buyers simply go with their gut feelings and romanticize the day they will finally own their own business. This leaves many buyers unprepared to face the very real challenges they may encounter in the early stages of operating a business.

As you preform due diligence, you engage in an investigative process by which both buyer and seller should request information about the other to assess the viability of the target company. This enables the buyer to make an informed, rational decision about the acquisition. The most important aspects to consider during due diligence process are the financial books and records kept for the company. You should be able to follow the flow of funds to see the income, cash flow, overhead and expenses of the business as it currently operates. Many people simply are not familiar with the process to properly assess a company’s financial records. This may be a great time to utilize the services of an accountant or other tax professional. In addition to your business broker, they can properly advise you on the financial stability of the company before you complete the transaction.

Many people simply are not familiar with the process to properly assess a company’s financial records.

Be Specific

Besides the general seller information, (name of business, address, phone number, primary product/service, location etc.) you will want to specifically outline every aspect of the inclusiveness of the sale. An important area to focus on is the current business assets held by the company. This includes:

Real Estate.
Any accounts receivable.
Cash, cash accounts and other banking documents.
Contracts held within the company.
Inventory on hand.

Equipment and supplies.
Customer lists.
Website and social media accounts.
Intellectual property rights.
Patents, trademarks, logos, or any other assets.

There's more...

Another area to focus your due diligence on are any government licenses, permits or other rights granted by any governing agencies. Generally, in the sale of a business the license will transfer over to the buyer as a person-to-person transfer. Once an offer is accepted, the buyer and seller will open an escrow account and the escrow company will file a notice of intent to transfer with the governing agency. These transfers can take months to complete and your business broker should work with you in this regard so you know exactly what to expect. This process will vary greatly in time and difficulty, depending on the type of business you are looking to purchase and the local laws applicable in the merger or acquisition.

Employees

Employees are a vital asset to any company or organization. Employees can make or break a business. Typically, a buyer has no obligation to employ the current personnel but they may choose to do so. A business purchase agreement may also require the seller to indemnify the buyer against any employee obligations that may arise prior to the closing date. The buyer may request as part of the purchase any documentation concerning agreements that are in use between the employer and its employees. These may include:

Employee or independent contractor agreements currently in use
Non-disclosure on non-compete agreements
Wage reports including audits and labor dispute agreements
Government documentation required for employers on its employees

Remember, in most cases the seller tax liability for the sale.

Non-Compete

The buyer should also include a covenant not to compete for the seller and any owners/partners involved in the business to ensure the business will remain competitive in the market as it currently stands. No one would want to buy an existing business if the seller of the company had plans to start a new business with the same business model in the same market area. This would also include an agreement to not solicit business from any of the seller’s current customers. In this process the buyer asserts that they retain and use any legal remedies available for a breach of a non-compete covenant, including injunctive relief.

Tax Responsibility

In most business sales, the seller assumes responsibility for any taxes which are payable in connection with sale of the business assets. Make sure that taxes are prorated to the date of closing with respect to the real estate sale. In this process the buyer may ask the seller for appropriate tax documents including:

Prior year federal and state tax returns
Reports listing any tax arrearages or disputes
Documents on the occurrence & outcome of prior tax auditing

Reports listing any tax liens of real property or assets

Creditor List

A complete listing of creditors is also necessary to perform due diligence. This list should include any amounts currently owed to the creditors. In compliance with the Uniform Commercial Code, the seller should notify all creditors of the business sale or transfer. Copies of any credit agreements should be provided to the buyer.

At Closing

The buyer should be put in a position at closing to be in complete and actual possession and ownership of the assets, free from all liens for the business that is being acquired. The deed for the real estate, bill of sale for the equipment, assets and inventory shall be provided by the seller for the buyer. The assignment of contracts, leases, patents, trademarks and copyrights shall also be assigned to the buyer from the seller. Any government licenses, including certificates of occupancy, motor vehicle titles, licenses, tariffs and any other approvals or applications required by applicable governing agencies should be transferred to the buyer.

Buyer's Responsibilty

In addition to the seller’s responsibilities the buyer also has some responsibilities of their own in order to complete the business sale transaction. The payment for the purchase of the business is clearly the most important one, but there are a lot of other things that should be looked into here. The buyer should present all legal qualifications and authorizations from the applicable governing bodies. A corporate resolution authorizing the buyer to purchase the business assets should also be provided. The buyer should be responsible for all inspection results on the property being sold to guarantee financing and provide reasonable assurance of proper financing for the acquisition of the business. The buyer should also be responsible for environmental reporting on the property to ensure it meets federal, state and local guidelines regarding potential regulations.

Use A Broker

All of these should help you preform the necessary due diligence when looking to purchase a business for sale. Remember it is extremely helpful to use a licensed business broker when looking to perform a business acquisition.

Shawn Davis and his team at LINK Business are always looking out for your best interests whether purchasing or selling a business. So if you need help with any of these items, please don’t hesitate to give our team a call:

1-949-799-1190

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