Due Diligence When Buying a Business

Buying a business is an arduous, yet potentially rewarding process, and can take weeks or months. Because buying a business will involve investing a fair amount of money and time, it is critical to do your homework when gathering information about the business.

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In most purchases of small businesses, the buyer will want to learn everything possible about a business before signing the purchase agreement. (Alternatively, if there isn't time to do that, then the buyer will want to make sure that the representations of the seller concerning the business are quite comprehensive and that the definitive agreement allows him to back out of the deal if the due diligence done after signing the definitive agreement is not satisfactory).

Why Do Due Diligence?

Conducting proper due diligence will help the buyer avoid the following problems:

• Discovering that the purchase price of the business is too high
• Misunderstandings as to the type and condition of the business being bought
• Bad financial situations
• Bad management
• Pending lawsuits
• Contingent liabilities

Doing Your Homework

Following is a list of some of the main documents you should expect to receive in the course of your due diligence:

• Key contracts
• Financial statements
• Customer lists
• Employment agreements
• Minutes and consents of the board of directors and shareholders
• Confidentiality and Invention Assignment Agreements with employees
• Corporate charter and bylaws
• Litigation-related documents
• Patents, copyrights, and other intellectual property-related documents
• Licenses and permits related to operation of the business

Click here to view a sample Due Diligence Checklist. Be sure to also read What Does 'Due Diligence' Mean When Buying a Business? for more on this topic.