Buying A Business? Due Diligence Potential Pitfalls

due diligence potential pitfallsDoing your due diligence is critical before making the decision to buy a business. Buying a business is no time to wade in on assumptions and a lack of factual information. It is critical to carefully examine and evaluate a business before purchasing, 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.

  1. Retirement Plans

Buyers often fail to consider retirement plans when examining a business prior to acquisition. On the other side of the coin, owners of a firm seldom think to make sure the plans are in proper order to transfer when they decide it is time to “sell my business”. The failure of either party in the sale of a business can have disastrous consequences. Because of this fact, as a potential buyer, you should be sure the business you have an interest in buying has both their qualified and non-qualified retirement plans current with the Department of Labor. Any given transaction will have some surprises once you have made the decision to acquire a business, but failing to properly vet retirement plans is one surprise you’ll definitely want to avoid at all costs.

  1. 1099’s and W-2’s

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 1099’s have been distributed in lieu of W-2’s, that the practice has always followed existing IRS parameters. There is nothing good that can come from deciding to buy a business, only to discover an IRS issue that could run the gamut from “headache” to “serious problem.”

While we are thinking and talking about employees, does the selling a business maintain employee handbooks? If so, review them with care.

  1. All Legal Documents

The corporate veil exists for a reason and you certainly do not want it pierced after you take over. Because of this fact, as a potential buyer you will want to carefully review all the trademarks, copyrights and other intellectual property to ensure everything is in order. Additionally, obtain copies of any consulting contracts, invention documentation and any owned intellectual property.

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 owner who is selling a business 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.

Protect Yourself from a Post Closing Blues

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. Naturally, there is little margin for error.

It is vital to do due diligence on the major areas of a potential purchase. Exploring the smaller details - and we’ve outlined a few of them here - is also essential. 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, who are experts on how to sell a business and how to buy one. Working with a highly experienced investment banker, merger and acquisitions 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.

About IBG Business:

IBG’s professionals have provided merger and acquisition services to the US middle market since 1986.  Their award winning M&A broker and advisor experts have an industry leading track record of 1,100 + successful transactions.