Look Carefully Before You Leap Into Buying a Business

One of my favorite types of legal transactions is helping someone buy a business. Often I am brought in at the end after a binding letter of intent has been signed and the negotiations are done. This can be a mistake, and not just because the form contracts the business broker supplies are weighted toward the seller.

Buying an existing business can be a great option because someone else has done much of the legwork for you, such as establishing good will, developing a customer base, hiring and training employees, and negotiating a lease.

It is essential for the buyer to conduct extensive due diligence into every aspect of the business, and he or she needs the opportunity to adjust the price or walk away if problems are discovered. It is essential to know what to examine.

Here are some key questions to ask when evaluating a puchase option:

• Why is the Seller selling?

• What is the five-year financial trend for the business revenues? Why?

• Are there processes in place that would allow a new owner to replicate the success?

• What condition is the equipment really in? How was it maintained?

• What will you do about the lease—sign a new one or take over the existing one? How long is left on the existing lease and what happens when the term expires?

• Review key contracts of the business. Are they assignable? Do you want them?

• Review the intellectual property. Are there patents owned by the business? Can the name, logo and slogans be registered as trademarks? If so, have they been? How easy will it be to transfer the website? Other software services essential to the business? Often these contracts are non-assignable, and the buyer will have to buy or license new software.

• Are the current employees properly classified and have they been properly paid overtime and other benefits? Even if you buy the assets and not the stock, if you continue poor employment practices and operate the business essentially the same way the previous owner did, you may be liable for all employment law violations.

• Are all taxes of the seller current, including income, payroll, real estate and business personal property? The local taxing authorities can come after the new owner of personal property assets if the former owner didn't pay the property tax.

• Are there any liens against the Seller? Are any assets encumbered by security interests?

• Are there key employees who need to stay to make the business successful during the transition? Are they happy? Helpful? Pleasant?