Before closing on the purchase of a business, thoroughly performing your due diligence is critical.
Buying a business is no time to wade in on assumptions and a lack of factual information. Carefully examine and evaluate the business, as dire results can visit those buyers who fail to investigate.
With that in mind, let’s look at three areas that are often given inadequate attention before committing to buying a business.
When examining a business prior to acquisition, buyers often fail to consider the existence of retirement plans. Conversely, owners seldom think to make sure the plans are in proper order to transfer when they decide it is time to sell the business. Failure of either party to do their part can have disastrous consequences.
As a potential buyer, you should be sure the business’s qualified and non-qualified retirement plans are current with the U.S. Department of Labor. Any transaction can spring surprises once on you, but failing to properly vet retirement plans is one surprise you should avoid at all costs.
1099s and W-2s
In addition to retirement plans, another area that prospective buyers often don’t think of investigating is 1099 and W-2 filings. Simply put, as a buyer you will want to ensure that, in cases where 1099s have been distributed in lieu of W-2s, the practice has always followed existing IRS parameters. Nothing good can come from discovering, too late, an IRS issue that could run the gamut from “headache” to “serious problem.”
While we are thinking and talking about employees, does the business maintain employee handbooks or employment agreements? If so, review them with care.
All Legal Documents
The corporate veil exists for a reason, and you do not want it to be pierced after you take over. Carefully review all the subject company’s trademarks, copyrights and other intellectual property to ensure that everything is in order. Additionally, obtain copies of any consulting contracts and invention documentation.
Avoid the Post-Closing Blues
All of the items listed above should be protected and on sound legal footing. If you unearth potential problems in any of these areas, as a potential buyer you should try to work with the seller to satisfactorily resolve any and all issues. If that cooperation isn’t materializing or solutions prove elusive, you may want to find another business to purchase.
The moral to this blog post is simple: Evaluating the commonly overlooked areas of a business sale is a simple matter of protecting your investment. For most people who are considering doing so, the act of purchasing a business will be the largest transaction of a lifetime. As you probably suspect, there is little margin for error.
It is vital to perform due diligence on the major areas of a potential purchase. Exploring the small details is also essential, although as you delve into the process of buying a business, you will realize that there are no “small details.”
No one understands this fact better than M&A brokers and advisors or, for smaller business acquisitions, business brokers. Working with a highly experienced investment banker, M&A specialist or business broker is an important step in protecting your business acquisition. Your investment in properly investigating, exploring and evaluating a business is a wise move and may well save you from major regrets.