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The Importance of Doing Your Due Diligence Before Buying an Existing Business

Posted by John Inhulsen | Jan 03, 2020 | 0 Comments

Purchasing an existing business is a major decision that many buyers are making. Last year, more than 500,000 businesses underwent ownership transitions, and that number is expected to skyrocket in the next several years as baby boomers retire.

Buying a business has become an increasingly popular option for various reasons. For one, it's a fast track to entrepreneurship - you get all the perks of being an owner without enduring the time-consuming and costly labor that comes with launching a new company. But, as with any business transaction, there are several potential drawbacks to look out for.

Due diligence is a period where you gather as much detailed intel and information you can about a business before you buy it. In your journey to becoming a business owner, due diligence is a critical step that shouldn't be skipped. During this period, it's recommended that you work with an attorney and an accountant to ensure you get all of the appropriate information you need to make an informed decision.

Within the due diligence process, there are specific business documents, statements, and files that you'll want to garner and analyze. They include the following.

Permits and Business Licenses

It's important to affirm that the business you're seeking to buy is thoroughly following state business licensing laws. This means that there should be proof that said business has the licenses and permits it needs to operate without any regulatory issues. Businesses in certain industries, like childcare or food services, for example, need an authorized permit to stay open.

Leases and Contracts

Before buying a business, make sure to have a clear understanding of its lease agreements and contracts. You can do so by talking to the landlord about transferring over these legal documents in your name or otherwise negotiating a new lease.

You'll also benefit from reviewing agreements that the current owner has with customers and other parties. For example, if you found out that more than a good portion of the business' revenue comes from one or two clients, you'll probably want to reconsider the decision to buy.

Zoning

Inspect the zoning laws in the area where the business is located to confirm there aren't any violations. Some areas have incredibly strict restrictions for commercial use, while other areas are much more lenient. Learning the area and getting a clear picture of the company's leg-room in a certain area will save you a lot of trouble in the long run.

Letter of Intent (LOI)

A letter of intent is an affirmation from the current business owner that they intend to sell the business. An LOI is typically issued when both you and the seller have agreed on a price point, assets, and liabilities incorporated in the transaction.

Once you've gathered enough information for due diligence to conclude, you'll be able to make a final decision about whether to buy the business.

Contact Inhulsen Law

Inhulsen Law is experienced in representing buyers and sellers in the business transition process.  To see how we can help contact us today at 616.747.0000. 

About Inhulsen Law

Inhulsen Law is a boutique law firm focused on Michigan businesses, owners, and their related issues.  Intentionally small, we work in partnership with our clients to promote their success by providing practical and cost-effective services.  To learn more, visit our website, follow us on Twitter, like us on Facebook, or connect on LinkedIn.

About the Author

John Inhulsen

John Inhulsen specializes in providing strategic legal counsel on business and litigation matters, and is consistently recognized by Super Lawyers and Best Lawyers in America for his work.

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