Due Diligence — A Common Sense Checklist

  • March 14, 2019
No Comments

Due Diligence – A Common Sense Checklist

So you’ve decided to buy your first business – congratulations! It’s a big step to take, and one that can make most of us more than a little nervous when we’re just starting out. That’s why we put together this “Common Sense Checklist” on how to go about making sure that you’re buying into a successful operation, and not getting ripped off by someone trying to offload their own failing business model!

Investigate the Business’s Finances

Don’t just take the other party at their word when it comes to the finances of the business that you’re interested in purchasing. You’ll want hard facts, which can only be found in documentation. You’ll want to review their current balance sheet, the past five years’ worth of profit and loss statements, and anything else that will serve to evaluate their financial health. Don’t forget to investigate the business’s debts, too, and you should also check to see if any creditors have any security liens against the business’s assets. After all, a business’s unpaid debts are passed on to their new owner, and that’s not the kind of thing you need weighing you down when you’re just getting started.

Review Any Physical Assets

If you’re purchasing a business’s physical assets such as inventory and equipment in addition to the business itself, then these assets need to be similarly evaluated. Ensure that no products are damaged, defective, or tragically outdated, and double-check that all equipment is functional. If you’re unsure what to look for here, consider hiring an expert to help. If some of the equipment is on lease, make sure that you have the right to take it over by reviewing the leasing terms.

Read the Lease. Seriously. Read it.

It’s more likely than not that the business you’re purchasing is on leased property. If that’s the case, obtain a copy of the lease and review it at least as carefully as you did with the business’s financial documents. Some leases will require the landlord’s permission before you take over, while a few others prohibit any sort of transfer at all. Other important terms to consider include the duration of the lease, whether or not it can be renewed, and possible restrictions that could get in the way of operations.

Pay Attention to the Business’s Legal Status

When buying a corporation or limited liability company (LLC), you’re typically deciding between purchasing the business’s assets and the business entity itself. Purchasing the assets is relatively straightforward but purchasing the actual entity will require a little more scrutiny. You should review the documents that created the entity, such as the Articles of Incorporation or Organization, as well as supplemental documents such as Operating Agreements and bylaws. Check that the business is in good standing with the state and that the owner actually has the legal authority to sell it to you. To protect yourself going forward, ask about any pending or threatened lawsuits against the business, as well as any governmental proceedings.

Get a Guarantee from the Owner

Effective risk management means looking into every possibility. Even if you follow the previous steps to the letter, there’s no guarantee that other nasty legal and financial landmines aren’t tucked away somewhere waiting to explode at the worst possible opportunity. Get a written guarantee from the present owner confirming that the information you have is complete and accurate and include this guarantee into the purchase agreement under the heading, “Representations and Warranties.”

Don’t Pay Everything at Closing

Paying the full purchase price at closing is a rookie mistake, but a forgivable one. However, for best results you should arrange for some of the price to be paid out at a later date, perhaps six months or maybe a year out from the closing date. Doing so means that, should you incur losses because of information withheld by the previous owner, you will be able to mitigate the damage by deducting the money from what is owed.

Looking to start a business or grow your current business? Contact FL Patel Law today by visiting our website, www.FLPatelLaw.com, or calling 727-279-5037.

Tyler Thompson is a second generation St. Petersburgian with a passion for reading and writing. In 2018 he finally made his way to FL Patel Law PLLC where he has found a home for himself as Project Manager. He is an unapologetic dog person who enjoys spending what free time he has with his friends and family.

    About us and this blog

    This our small business law blog. We provide information about Florida business law, LLC's, C-Corporations, S-Corporations, contracts, and provide resources for small businesses.

    Request a free consultation

    If you have a question about starting your business, want to discuss a contract, or would like counsel on a specific matter please do not hesitate to contact us. We provide a free 30 minute consultation for all new clients.

    Subscribe to our newsletter!

    Fields marked with an * are required

    8 Components to Effective Delegation

    8 Components to Effective Delegation Just about every entrepreneur knows that being a “business owner” means, effectively, working multiple jobs.…

    Florida Acquisitions — Getting the Most for Your Business

    Florida Acquisitions – Getting the Most for Your Business If you’re selling your business, then you probably don’t need us…

    Employees, Contractors, and Audits: Why Misclassification Matters

    Employees, Contractors, and Audits: Why Misclassification Matters In recent years, economic shifts and advancements in technology have led to unprecedented…

    9 Issues to Figure Out Before Starting a Joint Venture

    9 Issues to Figure Out Before Starting a Joint Venture As excited as you and your partner might be to…