When purchasing a business, there are many issues which need to be taken into account. This is true whether the buyer is purchasing the entity, such as a corporation or LLC, or just the assets. This blog entry is focused on what questions to ask when purchasing a business. Future blog entries will address the specific decisions to make regarding these questions. Hopefully, by reviewing these blog entries, you will learn enough to see the importance of getting good legal counsel when purchasing a business.
When purchasing a business, the most important document at the outset is the purchase agreement. That agreement should address all aspects of the purchase and should particularly address the questions set forth below.
What investigation or due diligence will the Buyer be allowed and how long will the buyer have to complete the due diligence? Usually, a buyer will be given a period to investigate the business and the time for completing the investigation should be addressed.
What disclosure, representations and warranties will be made by the seller and by the buyer? Sellers are often required to disclose known problems and to represent matters such as the seller’s authority to enter into the agreement.
What assets are being purchased? Is there real property, tangible property, intangible property, a business name, or inventory?
Does the seller own any copyrights, trademarks, or patents, in connection with the business and will they be included? Where applicable, these types of assets pose important and challenging issues.
If the business is a franchise, is approval of franchisor required? Usually a franchisor’s approval is required but either way, it should be addressed.
Does the seller have any licenses or permits and if they do, can these be purchased or assigned?
Are any governmental or regulatory approvals required? If they are, who is obilgated to get them and what if they are denied?
What is the status of taxes (such as income, sales, and payroll taxes) in connection with the business? Whose obligation will it be to file and pay these taxes?
What is the status of accounts receivable and who will have the obligation to collect these receivables?
What debts, liabilities, liens, lawsuits, and insurance claims are there in connection with the business and who will have the obligation to pay these? Not addressing these can pose a huge risk–particularly to the buyer.
Does the business have any pre-paid services, gift certificates, or warranties? If they do, whose obligation will it be to fulfill them? This is often overlooked and can pose a huge liability to the buyer in the future.
Does the seller have a lease, and if so, what are the terms and can it be assumed? Often a business’ location is important the buyer will want to take it over.
Are there any prepaid expenses, deposits or adjustments to be made to the purchase price? The agreement should address how these will be handled.
Will the seller be signing any non-compete, non-disclosure, or non-solicitation agreements? The buyer does not want to take over a business only to have the seller competing down the street!
Will the seller be agreeing to indemnify, hold harmless or defend the buyer from any liabilities or claims?
Will the selling owners be participating in or assisting with the busines after the sale? If they will, under what terms?
Are there employees coming with the business and if so, what is their status, are there obligations owed, are they loyal, are there problems, are there any work comp claims pending?
What amount of deposit or earnest money will be required and who to be escrow agent to hold these funds? Under what circumstances will it be refunded to buyer?
How will closing costs be allocated and who will have the obligation to pay them? Closing costs can be significant and there’s no absolute rule on who pays what–the agreement should specify.
What contingencies are there to close? For example, is buyer obtaining financing a condition?
What will be the date and location of closing and who will be the closing agent?