When buying a business, what are the most important things to look for during due diligence?

While the answer may vary depending on the kind of business you are buying, there are certain things you should always look for during your due diligence period in any asset purchase no matter the size or nature of the business.  Some of those include (and this is by no means an exhaustive list!):

1. 1. Financial Statements:  This one may be a given, but its importance cannot be understated: the business’s financials (example: balance sheet, P&L, income statements, cash flow statements, accounts payable, accounts receivable, etc.). Other financial documents or matters that should be thoroughly vetted include the business’s overall assets and liabilities including: any liens on business property or equipment; liens against the business itself or any of its owners or members; leases, whether real estate, equipment, or otherwise; mortgages on the real estate, loans and/or notes payable; receivables, etc.

• • Seller Entity Documents:  The business’s organizing and governing documents (for example: operating agreement or shareholder agreement, bylaws, meeting minutes, etc.). It’s particularly important to make sure the company is in good standing with the state Secretary of State’s Office. If, for example, the seller’s entity has been administratively dissolved (perhaps unbeknownst to the seller), there would be legal implications and additional steps the parties would have to take in order to close the deal.

• • Contracts:  You should obtain copies and perform a detailed review of any contracts or agreements into which the business has entered (client contracts, vendor agreements, bank loans or financing agreements, escrow agreements, leases, employment contracts, agreements with third-party payment processing, service/maintenance contracts, etc.).  This is an important area where one should seek guidance from an experienced attorney.

• • Employees and Employment Agreements:   You should obtain copies of any employment agreements, employee benefit plans, leave balances, and the like.  It is critical to evaluate employment agreements (or the absence of) of key employees that may be essential to the transition and post-closing operations of the business.

• • Inventory, Licenses, Insurance:  If you are a business that relies on inventory (for example, a restaurant or retail business), you should evaluate the company’s inventory and schedules for delivery, rates of consumption/sales, etc. The seller should disclose all licenses and permits the seller holds, along with insurance policies (and whether they are transferrable).

You’ll need to look into several other essential issues during due diligence.  An experienced business attorney can advise you on those specifics and offer guidance reg