If you are considering buying a business, what steps would you take when purchasing an existing business? There are many steps a person should complete to finalize a transaction of this complexity and to protect his or her interests. An existing business will have formed relationships with vendors and established a client base. The new owner may also, however, inherit some of the business’s problems. After deciding which business to purchase, the buyer will need to conduct a thorough due diligence in order to gain a clear understanding of the business’s current situation, its potential, and any existing or expected challenges. A comprehensive buying a business checklist can give you an overview of this process. Buying a business can be complex. Therefore, if you are ready to evaluate a business in order to buy it, consider contacting Polymath Legal PC at (833) 931-6418 for answers to your legal questions.
How Do You Do Due Diligence When Buying a Business?
Due diligence is defined as a reasonable action for people to take to keep themselves, others, and their property safe. A comprehensive “Buying A Business Checklist” should recommend carefully searching all available information about the business, which may be available online through a public records search or through a direct request to the seller. Specific items to locate or information to find include:
- Business licenses and permits
- Organizational documents
- Relevant zoning laws
- Environmental regulations
- Insurance policies
- Letter of intent
- Business reputation
- Contracts
Business Licenses and Permits
Check that the business you are interested in purchasing has all necessary licenses and permits. If the business is not operating legally, it can be shut down. Many businesses require special permits to remain open, so be aware of the requirements for your proposed business to avoid having issues soon after the transaction is complete.
Organizational Documents
Review the current type of organization and business structure. Official founding paperwork may not exist with a sole proprietorship or partnership. However, registered entities, such as corporations or LLCs, are required to provide organizational documents to the state before they can become registered. Interested parties can perform a search via the California Secretary of State online portal to check the legal status of the business and ensure that it is in good standing with different agencies.
Relevant Zoning Laws
Check local zoning laws to ensure that the type of business you are interested in purchasing is allowed to operate at the proposed business location, whether new or existing. Even if the current owner may be operating the business at that location, he or she may not necessarily be doing so legally. In addition, although the previous owner may have been “grandfathered in,” the same rule may not apply upon a transfer of business ownership.
Environmental Regulations
According to the United States Environmental Protection Agency, there are various regulations that small businesses must comply with. Therefore, prospective buyers will want to ensure that the projected use of the property correctly meets all relevant regulations for the location.
Insurance Policies
Prepare to transfer, if possible, the business’s current insurance policies as part of the purchase transaction. The prospective buyer will want to review the following policies to determine which can be transferred and which may need to be replaced:
- Commercial property insurance
- General liability insurance
- Auto/fleet insurance
- Umbrella policies
- Workers compensation insurance
- Data breach insurance
Letter of Intent
The letter of intent, which should be readily available for the prospective buyer, provides a summary of the proposed transaction, which may include:
- The proposed sale price
- The business assets and liabilities that will transfer upon sale
- Terms and conditions of the business sale
Business Reputation
Since the new owner will most likely inherit the reputation of the existing business, a prospective buyer may want to research its reputation in the community. Newspapers and other forms of media may have information about the business. An internet search with the name of the company followed by the letter “v,” which stands for versus, may indicate whether the business has been involved in legal action. Online reviews from former employees or customers are another good source of information for a prospective buyer to get a better sense of the business, its practices, and its history.
Contracts
As an existing business, it may be subject to various contracts. Some, if not all, of those contracts might remain in effect after the business is sold. A prospective buyer may request various contracts to review, including:
- Leases for the building and equipment
- Employment agreements
- Customer agreements
- Vendor or supplier agreements
- Sales representative agreements
- Distribution agreements
- Financing agreements
- Buy/sell agreements or stock purchase agreements
- Company vehicle leases
- Non-disclosure agreements
- Non-compete agreements
- Licensing agreements
A knowledgeable business lawyer from Polymath Legal PC can help to conduct the due diligence process. With thorough research, you should feel more comfortable with the transaction before entering into any binding contract.
What Questions Should You Ask When Buying a Business?
Once you have conducted due diligence, you can begin to determine a fair price for the business. You may consider the following questions:
- What are the business’s assets? If you will be receiving assets in the business, such as equipment or inventory, it will help to calculate their value. Determine if there are any existing agreements or loans regarding any of the assets. Also be aware of intangible assets, such as intellectual property and business goodwill
- What are the business’s debts? Review the business’s debts and loan agreements, including those for business inventory and equipment. Check whether any debt will be paid off as part of the purchase or if you will assume it
- What is the company’s net worth? Calculate the business’s general net worth by subtracting liabilities from assets. Some prospective buyers may find that having an expert determine a valid price for the business saves time and stress
- How do the financial statements look? A prospective buyer can ask the business owner for a copy of the most recent financial statements, which typically include:
- Income statements
- Cash flow statements
- Balance sheets
- Accounts receivable and accounts payable reports
- What information is on the most recent tax returns? A buyer can request copies for the last several years of tax returns to evaluate a business’s overall value and potential
- What is on the business’s credit reports? When a person is interested in buying a business, he or she can request copies of the business’s credit reports
Secure Funding and Close the Deal
After the due diligence is completed and the questions have been asked and answered, it is time to secure funding to buy the business as planned. Buyers may have several options to fund a business purchase, including:
- Owner capital
- Crowdfunding
- Seller financing
- Business partners
- Selling stock
- Leasing the business prior to sale
- A bank loan
- A Small Business Administration loan
Closing a business sale may involve a lengthy process of signing many documents. The closing process may include:
- Reviewing financial statements, tax rulings, and accounting records
- Signing off on a list of assets subject to the agreement
- Filing necessary documents with the court
- Obtaining necessary approvals
- Transferring title to business assets
- Signing various legal documents
Contact Polymath Legal PC for Help
As is apparent from the buying a business checklist above, purchasing an existing business can be a complex process. There are many important steps to take from deciding to buy a business to closing on the sale. If you are ready to buy and want help with this important decision and with protecting your interests at each step, consider contacting Polymath Legal PC by calling (833) 931-6418 to schedule a consultation.