Performing due diligence for buying a business

Prior to purchasing, it's vital to know the business structure, so you know exactly what to expect. For instance, you may purchase half of a partnership. Or, you may be buying shares in a liability limited publicly-traded company or even part-ownership of an LLC. Understanding how these business types operate will ensure a smooth transition.

What is the existing business' history?

Another important aspect of due diligence investigation is understanding the business' history. While researching the company, you will need to find out information such as:

• How long has the business been in operating in professional standards legislation and legal proceedings?
• How many key employees did the business have?
• What is the employee benefits tax returns or employment contracts?
• How many owners has the business had?
• Who is its current owner? And;
• Does the business have any financial due diligence clause or outstanding liabilities and is litigation pending?
• What are the key assets, asset ownership, or business suitability?
• How does the business perform?
• Are there any similar businesses competing?

Failing to check may result in inheriting unwanted legal issues. So, remember to ask professional advice regarding the current owner for all accounts payable and receivable, income statements, and profit and loss statements. Also ensure you enquire about all utility accounts, current business loans, and other lines of credit.

Research existing contracts on intellectual property

Any existing business you purchase will have current valid contracts, binding contract, or supply contracts (i.e. with suppliers, technicians, freelance contractors, and others). Part of your due diligence in finding out whether these contracts will be transferred to you upon sale depending on how much money it cost. Once the sale is complete, all of these contracts are your responsibility. So, it is crucial to understand the details of each, as well as your rights and obligations before signing the contract of sale. It's very important to understand your obligations toward each existing client. The key reason for this is the profit you generate from them will keep the business running.

Who are the business' current employees?

Regular business operations must continue uninterrupted during the sale and transfer of the business you are buying. This is especially important if the company has current employees who you intend to keep on the payroll. If you plan to do this, get confirmation from the seller that the retention of current employees is part of the contract. If this is the case, ensure you understand employee rights and obligations, as stipulated in their contracts. This information will prove quite useful if you ever need to perform a business restructure and eliminate redundancy. It's also handy should you ever need to lessen your employee numbers (i.e. due to a decline in sales or falling profits, etc.).

What current lease arrangements are in place?

When researching a potential business purchase, your last act of due diligence is perhaps the most important. It is imperative that you understand whether there are current lease arrangements for the business premises. As part of most sales contracts, lease agreements are usually transferred via a deed of assignment to the new owner. After the sales process is complete, you must understand the terms of the lease on your building, office, or warehouse.

Generally speaking, existing leases do not have a stipulation allowing for term changes, even after ownership is transferred to a new party. So, before agreeing to the purchase terms, make sure you review all existing lease terms carefully. And, only if you are satisfied with these terms should you continue the transfer of ownership process.

Are there any warning signs to look out for?

The simple answer is: "yes". However, identifying these warning signs is now much easier thanks to thorough due diligence. Conducting due diligence will help you evaluate the risks and merits associated with the type of business you plan to buy. This process will require plenty of time and patience on your part. Yet, carefully reviewing all the pros and cons will ensure you make the right decision for you.