Buying a business is a great way for an entrepreneur to hit the ground running by acquiring a going concern with existing clients, cash flow and infrastructure such as an office and employees. Buying an existing business can also come with liabilities though, and discovering the extent of those liabilities is a critical step before closing the purchase of a business. Buying a business is expensive, and so you want to know that you are getting what you are bargaining for.
Having a comprehensive due diligence process from the start of the business purchase negotiation will help increase the likelihood that you are protected from unexpected debts, liabilities, lawsuits and other surprises.
Here’s a non-exhaustive list of what to look out for when negotiating the purchase of a business:
- Financial and Tax Due diligence. The business’ recent financial statements should be reviewed to understand the historical financial performance of the business and to determine if it aligns with the projections. This will also give you insight into the debts of the business which you can negotiate to offset against the purchase price.
- Location, location, location! If you plan to operate out of the same location from which the seller operated, you must determine if the premises are owned or leased early. If it is owned, searches should be conducted to ensure the property you are buying is compliant with laws. If it is leased you need to ensure the terms of the lease are favorable and meet your needs, and also determine if there are any restrictions to assigning the lease. You don’t want to close only to discover that the landlord refused to assign the lease to you. A physical inspection of the premises is also important to ensure that it is in a state that is suitable for your proposed use and to ensure that all damage is rectified by the seller prior to closing.
- Physical Assets. You should get a list of and inspect any physical assets of the business you expect will be included in the purchase. You should also ensure there are no liens attached to any of the equipment.
- Review of material contracts. Lenders, suppliers, customers, employees, independent contractors and others may all have existing contractual relationships with the business. Review of all material contracts is highly important to make you aware of your obligations post-closing.
- Searches should be conducted to ensure that you do not become involved in any ongoing, outstanding or potential lawsuits against the seller in relation to the business.
- Corporate and Business Records. A review of the corporate minute book and other related documents will help ensure that any party that needs to consent to the business transaction has done so and that all business names you wish to purchase are duly registered.
The above is not exhaustive, as determining relevant due diligence requires an analysis of the nature of the business you are purchasing as well as what is important to you. A comprehensive due diligence process will ensure that your business purchase suits your needs and that you are adequately protected from liabilities which may accrue after you take over. The experienced lawyers at Grinhaus Law Firm can help guide you through the due diligence process, review, draft and advise on all legal agreements, conduct and advise on searches, and negotiate with the seller. Due diligence must be negotiated at the beginning of any purchase negotiation. If you are planning to buy a business or have already starting negotiating, call or email us right away to give you peace of mind regarding your business purchase.
PLEASE NOTE: THIS IS NOT INTENDED TO BE LEGAL ADVICE AND SHOULD NOT BE RELIED ON AS SUCH. IT IS IMPORTANT THAT YOU CONSULT WITH A LICENSED PROFESSIONAL.