Buying a business can be risky business, so it’s important to do your homework and negotiate some “safety nets” into the transaction.
Due diligence is the process in the transaction where you do your homework. Best practice would be to assemble a Super Due Diligence Team!TM –an accountant, inspector, etc., e.g.—and make sure you arrange sufficient time to do said homework. As the buyer of a business, there are numerous area you will need to examine, but two of particular import are “the books” and tax information. As far as “the books” are concerned, you’ll want to make sure the company’s records are complete, orderly, and make sense when you read them. Gaping holes in record keeping are red flags. A seller’s refusal to allow access or unreasonably restrictive access to records are also huge red flags. You will also want to ask to see proof of tax payments–payroll taxes, corporate taxes, etc. If there are any unpaid tax obligations, the Taxman is not going to care that you are the “new” business owner and the liability will be on you!
Besides thorough (early and often!) due diligence, a buyer will also want to weave some safety nets into the purchase transaction. A buyer typically wants the purchase to be an asset-only purchase rather than a stock acquisition. As the name implies, an asset-only purchase gives only the assets to the buyer and the seller retains ownership of the already existing liabilities. A seller who is insists on a stock acquisition rather than an asset-only transfer may raise a red flag. Of course there are many reasons why a stock acquisition may be preferable or even necessary; the buyer will just want to make sure that the reason is “above board” and the seller isn’t trying to pull a fast one.
Whatever form the purchase transaction might take, the buyer will want to seek indemnification from the seller for any claims related to the business that arise prior to closing. A seller who refuses to grant such indemnity may not have run such a tight ship while owning the business and are trying to evade the consequences once “it” finally hits the fan.
Whether you’re thinking of buying a business or you have a deal in the works, Jerry L. Freedman, APC is here to be on your team and make sure you’re well equipped for the transaction.