When done correctly and wisely, buying a promising business has the potential to yield long-term profitability. That being said, purchasing a business isn’t like buying a car or a house. It can be a complicated process full of those details in which the devil resides, and doing your due diligence is key to preventing hidden snags from coming back to bite you. Let’s explore some critical considerations you should look at before committing to buy any business.
What does the company’s debt sheet look like? Are there any back taxes owed (e.g., payroll tax, sales/use tax)? If you don’t dig into these details (especially taxes), you may find these liabilities are passed to you when you assume ownership. Ask the tax authority for a “letter of clearance” certifying that sales/use taxes are up to date, and if back taxes are owed anywhere, try to negotiate for the seller to pay these current first. With any other creditors, find out whether the state requires you to issue a “notice of sale” to them, and if you take on these debts, make sure you’re doing it on purpose with nothing hidden.
Open a conversation with the seller about Accounts Receivable; who is responsible for collecting unpaid debts from the customers/clients? You can opt to buy out the Accounts Receivable (preferably at a discount), or you can arrange for the seller to collect them—but make sure you resolve this question clearly before buying the business to eliminate confusion and so unpaid debts don’t fall through the cracks.
When you’re buying a corporation or LLC, it is important to purposefully choose whether you purchase business assets or purchase stock. Each has its own benefits, but each carries with it different considerations for the asset purchase agreement or stock purchase agreement. Consulting with someone well-versed in these transactional matters ensures the purchase agreement protects you in either scenario.
Businesses are complex animals, and even with the best due diligence and number crunching, sometimes an important detail falls through the cracks that could leave you legally vulnerable and facing a lawsuit over something that happened before you took ownership. Always get an indemnity from the seller—an agreement that if any such lawsuits happen, the seller will pay to defend it, as well as pay any fees and judgments.
There are, of course, many other details to consider in buying a business, which is why you should never do so without the help and advice of an experienced business lawyer. If you are considering purchasing a business, we’re here to help protect you. Call us for a consultation.
