Austin TX Business Law Blog

Monday, May 24, 2021

How to Conduct Due Diligence Before Buying a Business

Buying a business can mark the start of an exciting entrepreneurial adventure. It can also mark the start of a disaster waiting to happen if you do not do your due diligence in fully investigating the business you are purchasing. Without putting the work in and reviewing the business details closely, you risk falling into a money pit that may be more stress than it is worth. Here, we will discuss how to protect yourself and your business venture by conducting due diligence prior to buying a business.

How to Conduct Due Diligence Before Buying a Business

Due diligence is, essentially, the process in which the buyer verifies information about the business up for purchase. This information, provided by the seller, should be verified as accurate prior to completion of the purchase. Most of the time, due diligence will be a condition of the buyer’s offer. Should any issues being revealed during the due diligence process, the seller should address them prior to completion of the sale. While taking the time and effort to effectively conduct due diligence is important, to help ensure that due diligence does not greatly delay the finalization of the sale, it can also be important to prepare for it as much as possible.

During due diligence, the buyer and its team of support professionals, such as an attorney well versed in business law, should review and verify the accuracy of all financial information on the business. Financial information will include financial records such as income and cash flow statements, as well as any balance sheets and general ledgers maintained by the business. It should also include the business tax returns for the past three years, at a minimum, and all outstanding debts of the business, along with the terms and conditions of such liabilities.

You should also take the time to thoroughly review the business structures and operations. How is the business structured? How does it make money? It can be important to go all the way back to the foundational documents of the business, such as the articles of incorporations, bylaws, and any amendments to either of these documents. Furthermore, you should review any competitor research the business has conducted as well as its marketing plan and trends in the industry.

To avoid potentially substantial legal headaches down the road, it can also be important to review any outstanding, material contracts of the business. For instance, are there existing loan agreements or lines of credit outstanding? Is the business currently leasing any equipment? Will you be responsible for any of these outstanding obligations? Are there any joint ventures or business partnerships that you will be responsible for maintaining once you purchase the business? You should review any such agreements in place. It can also be critical to receive and review the business’s insurance policies and licenses and permits, as well as any intellectual property documents, such as trademarks or patents in place. Last, but certainly not least, review any and all documentation pertaining to lawsuits the business is currently involved in.

Business Law Attorney

The above is just the tip of the due diligence iceberg. It is a highly complex process. Get the benefit of trusted legal representation to help ensure the process is properly executed. Buying a business is too important of a venture to go without this. The Kumar Law Firm is here to help. Contact us today.

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