Some entrepreneurs love the challenge of starting a new business and creating everything from scratch. However, that may not be the best approach for everyone. Buying an existing business can eliminate the initial legwork of establishing a customer base, training employees, and securing start-up funding, but it is not without its own challenges.
If you have an agreement in principle with the business seller and have sent a letter of intent, you can proceed to conduct due diligence. While your attorney will guide you through due diligence, you should be aware of the information that will be reviewed during the process and what items might need your attention.
- Financial information. This includes income and cash flow statements, profit and loss statements, accounts payable and receivable, balance sheets, tax returns from the past three years, all debts owed by the business, profits itemized by each product or service, analyses of profit margins and expenses, and an inventory of all assets (including their total value).
- Business structure and operations. How is the business structured, and how does it earn money?
- Contracts. When you buy a business lock, stock, and barrel, the sale generally includes transfer of any contracts the seller made with other companies and individuals. It is vital that you know what is in these contracts and what obligations you might owe to other companies.
- Customer information. A principal advantage of buying an existing business is that presumably there is a preexisting customer base. However, you should confirm the strength of the customer base by closely examining sales records, subscriber lists, marketing and advertising programs, customer research data, and purchase and refund policies.
- Employee information. In addition to inheriting customers, you will also inherit employees when you buy a business.
- Legal liabilities. Does the company have any lawsuits filed against it or issues (e.g., missing licenses and permits, zoning laws, and environmental regulations) that could lead to legal disputes down the road? If so, is the business properly insured to help absorb the potential cost of a judgment or settlement?
- Tangible and intangible assets. Obtain a complete inventory of the company’s physical assets and real estate as well as its intangible assets, such as intellectual property like trademarks, copyrights, and cryptocurrency.
Buying a business, like starting a business, can be one of the most impactful life decisions you make.
Even if you have bought or sold a business before, there may be more than meets the eye to a
transaction, and every deal should be approached with a fresh perspective.
If you are interested in acquiring a company, Reid Council Law Firm can help you perform due diligence, negotiate a purchase price, safeguard against unanticipated liabilities, handle contracts, and properly structure and document the purchase. To schedule a meeting, please contact us at http://www.reidcouncilaw.com or (215) 258-4620.