A buyer can minimize the legal and accounting fees associated with the sale by having a thorough understanding of the business sale process. The prospective buyer will want to perform a due diligence review to confirm all of seller’s representations after making an offer and before closing. The qualified buyer knows that there is no such thing as TMI or “too much information” in making a business acquisition. The business owner that is able to promptly produce all requested documentation in good order and readily answers all questions is a positive indication.
Here is a checklist of issues you should address as you perform your due diligence. This list is not complete. Every deal is unique and presents different business-specific concerns. This list represents issues that frequently arise and, when properly addressed, will position you to best understand the full value of the business you are considering
Corporate Documents. Confirm that the corporate organizational documents are properly filed and that the business is in good standing in the jurisdiction where it was formed and is qualified to do business in all states in which it operates. The Secretary of State’s office is often the best source. The Indiana Secretary of State’s business search website is: https://bsd.sos.in.gov/publicbusinesssearch
Contracts. Make sure that any contracts and long term orders with customers and suppliers are available and up to date. Such contracts that are necessary for the future operation of the business should be assignable to a buyer and should not terminate or expire for a reasonable period of time following the sale. Additionally, you should confirm that no contract gives any party a right of first refusal or other interest that could preclude or impede the sale of the business.
Legal Issues. Very simply, are there any past, present or potential legal issues?
Real Property. Even if you plan on leasing the real estate occupied or required by the business ensure that all real property owned by the business is properly documented and titled. Check that all real property used in the operation of the business is correctly zoned for current operations and in compliance with all local ordinances and covenants.
Personal Property. Confirm that the business has title to all significant items of personal property. Perform a lien search to confirm that all such personal property is unencumbered. Confirm that all leases of personal property required for the operation of the business are assignable.
Lease Issues. If the business leases a building or real property, make sure the lease is assignable to a buyer. If a significant lease contains a prohibition against assignment, you may be forced to negotiate with a landlord at the 11th hour of the deal. If the business has revenue-producing property, you should confirm that adequate leases are in place to ensure the future rental income for the potential buyer.
Taxes. Confirm that all tax obligations are current and that all filings and returns are up to date.
Environmental Issues. Are there are any environmental hazards on the owned or leased property for which there could be potential liability? Evaluate the benefit of obtaining a Phase I or Phase II environmental assessment.
Employees. Focus on the management team and key employees. Longevity and turnover are two key metrics as are employee benefits, bonuses and written and unwritten agreements. Review OSHA records. The people who know how to operate the business and know the key customers and suppliers are very important to the value of the business. They are the bridge to your future success.