Buying a business is a major investment, so it is important to perform due diligence before making the purchase. While acquiring a business can be much faster and more profitable than starting one from the ground up, taking over someone else’s business can come with a lot of risks. An experienced business lawyer can help you understand the potential pitfalls. Our lawyers at Newburn Law have years of experience advising clients to help ensure they are making a wise investment. We can guide you through a standard checklist before purchasing a business. Contact us today to schedule a meeting with one of our experienced M&A lawyers.
QUESTIONS TO ASK BEFORE PURCHASING A BUSINESS
A checklist before purchasing a business essentially amounts to asking the right questions, understanding the answers, and examining all of the pertinent documents. The following are questions that every potential business owner should ask before purchasing a business.
HOW IS THE BUSINESS ORGANIZED?
The first thing you should know about a business you are considering purchasing is how it is organized. You must understand what type of business entity it is, such as:
- Limited liability company (LLC)
- Corporation
- Sole proprietorship
- Partnership
The form of the business has a significant impact on how the business operates, such as whether it has shareholders, how it pays taxes, and how much personal liability its owners are subject to. Some of the documents you would want to inspect when investigating a business for purchase include:
ARTICLES OF INCORPORATION
When a company is incorporated, it will have filed articles of incorporation with the Secretary of State in the state where it is incorporated. This document will tell you a lot about the business: its name, address, stock information, registered agents, and its corporate purpose.
BYLAWS OR OPERATING AGREEMENT
Bylaws, or an Operating Agreement, lay out the rules of how the company operates. Such documents should go into more detail than the articles of incorporation, but they may include information about:
- How the board of directors operates
- Responsibilities of officers and management
- Classes of stock or other ownership
- The annual shareholder meeting
- How to settle conflicts
CERTIFICATE OF GOOD STANDING
A certificate of good standing from a Secretary of State will show you that the company is still properly recognized by the state.
OTHER IMPORTANT ORGANIZATIONAL DOCUMENTS OF THE BUSINESS
- Organizational charts
- Lists of shareholders
- Several years’ worth of annual reports
- List of names and registrations
- Listing of the states where the business operates and conducts business
HOW ARE THE COMPANY’S FINANCES?
An essential part of the checklist before purchasing a business is inspecting the company’s financial condition. Understanding a company’s finances can be burdensome, but this due diligence is extremely important to ensure the acquisition is worth your while. Documents you should review for financial information include:
FINANCIAL STATEMENTS
A company’s audited (if available) financial statements should illustrate the company’s assets and liabilities. Inspect financial statements to understand not only how much the company owns, such as cash, inventory, land, equipment, and accounts receivable, but also how much it owes, such as accounts payable, taxes, loans, and other liabilities. You should also look at any analysts’ reports for similar companies to understand how much it costs to operate the business each year and what its potential profit margins are.
ACCOUNTING METHODS
When you take on a new business, you must understand its accounting methods, not only how it accounts for amortization and depreciation, but also how it handles its accounts receivable and payable.
OTHER FINANCIAL DOCUMENTS
You will also want to be sure to inspect:
- Several years’ worth of tax returns
- General ledgers
- Current contracts
- Audit and internal control procedures
THE COMPANY’S EMPLOYEES
Buying a company often means inheriting employees. You should be sure you understand not only the technical aspects of human resources at the company but also the work culture and environment. Some of the documents you will want to collect and review before purchasing a business include:
- Employee handbooks/policies and procedures
- Employee contracts, such as non-disclosure or non-compete agreements
- Benefit plans
- Employee stock plans
- Records of labor or employment disputes, such as collective bargaining grievances, harassment, discrimination, or other legal concerns
- Organizational charts or resumes to get to know the employees
REAL ESTATE, PHYSICAL ASSETS, AND INTELLECTUAL PROPERTY
You should familiarize yourself with the company’s property. You should be sure to inventory:
- All of the company’s land and real estate, both owned and leased
- Physical assets, such as machinery or equipment
- Inventory and work in process
- Patents, trademarks, copyrights, and trade secrets, or pending applications belonging to the company
LEGAL LIABILITIES ASSOCIATED WITH THE COMPANY
Buying a company means taking on the debts of the company. Even an extremely profitable company can be a risk if it is involved in a lot of litigation or contractual disputes. You should work with an experienced business lawyer to research the company and make sure you understand all of past and pending litigation, as well as identify potential risks for future litigation. Some important documents to help with this due diligence may include:
- A list of all current and potential litigation and unsatisfied judgments
- A review of all current contractual responsibilities, such as ongoing leases
- Copies of current insurance policies
- Compliance reports, certifications, licenses, and permits
WHO ARE THE BUSINESS’S CUSTOMERS?
A company is only as strong as its customers. When you take over a business, you should be sure to understand who the company’s customers are. Identify any long-term loyal customers or unique practices of the business to help smooth the transition. Some documents to familiarize yourself with the customers include:
- A list of customers, especially the largest customers
- Sales records
- Existing service agreements
- The company’s marketing and sales procedures
- Market research data
- Online reviews and feedback
DISCUSS YOUR PLANS WITH OUR EXPERIENCED BUSINESS LAWYERS
While this checklist before purchasing a business is a good start, there is no one-size-fits-all solution to purchasing a business. Depending on the size of the investment and the risk involved, you may need to do even more due diligence to ensure you are making a solid investment. Our M&A lawyers are extensively experienced in acquisitions and would be happy to guide you through the process of acquiring a new business. Contact our legal team today to schedule a meeting. We look forward to hearing your goals and objectives to help make sure you are making the best investment possible.
