Due Diligence for Company Acquisitions: A Checklist

Due Diligence for Company Acquisitions: A Checklist

So you’re finalizing your first company acquisition – congratulations! It’s a big step to take. 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.

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. A business’s unpaid debts pass on to their new owner. You don’t need that extra stress.

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 Ensure that no products are damaged, defective, or outdated. Check 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 to review. Some leases will require the landlord’s permission before you take over, while a few others prohibit any sort of transfer at all. This can cause major disruptions for your company acquisition. 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

In a company acquisition, 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. Review the entity’s formation documents, including the Articles of Incorporation or Organization, as well as the Operating Agreements and bylaws. Check that the business is in good standing with the state and that the owner has the authority to sell. To protect yourself, 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 during a company acquisition means looking into every possibility. There’s no guarantee that other nasty legal and financial landmines aren’t waiting to explode. Get a written guarantee from the present owner confirming that the information you have is complete and accurate. Then, include this guarantee in 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. However, consider paying part of the price at a later date, perhaps six months from the closing date. This way, losses taken because of withheld information are offset by deducting money from what is owed. For more information on how to avoid paying more than you have to in a company acquisition, check out our blog here.

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