Continued from Due Diligence When Purchasing a Business – Part One.
It’s also important to be certain about the extent of the company’s additional obligations. Is there a lease? What is the rent? Are there common area maintenance expenses? What is the term of the lease and are there options to renew? Must the landlord consent to an assignment? Be sure to review all existing leases including any addendums and amendments. Confirm with the landlord that the rent is up to date. Equipment leases should get the same scrutiny. Ask the seller whether there are pending or threatened lawsuits or governmental proceedings against the company. You’ll want the seller to retain such liabilities where possible. A business attorney can assist with negotiations and ensure that the purchase agreement reflects the seller’s retention of liabilities.
An important operational component of any business is the existing staff. Talk to key personnel such as officers, managers and supervisors to get a sense of their commitment and to get a feel for the employees’ level of productivity. Is there a risk of mass exodus with the departure of the current ownership? Do the employees seem content in their positions? Or does there appear to be a widespread discontent with working conditions and pay? If there is an employee manual, review it carefully. Does the company appear to follow its own policies? Does it comply with Federal and State employment laws?
If purchasing the business entity as opposed to the business’ assets (see Considerations When Purchasing a San Diego Business, Part One), be sure to review the company’s books in detail including articles, bylaws, resolutions, minutes, and/or operating agreements. Confirm that the books are up to date, that the business is in good standing with the State, and that the seller has the actual authority to sell. Whether or not you are purchasing the business entity or the business assets, ensure that all licensing is current and that business taxes are up to date.
Before closing any deal, ask the seller to personally guarantee that all of the information provided is complete and accurate. Your San Diego Business Attorney should insist on a “Representations and Warranties” clause to accomplish this goal. Once all the information is in, compare what you have learned about the particular business with the industry overall. What is its market share? Can it remain profitable under the current conditions?
A “due diligent” investigation ensures that the buyer has the clearest possible estimation of the company’s worth. It may seem a bit daunting but it is a worthwhile investment. See Purchasing an Existing Business Offers Benefits Often Overlooked.