So you want to purchase a company or business asset. Buying a company is an exciting venture and you may have high hopes for growing and expanding your business.
But buyer beware: before signing the dotted line, you absolutely must do your due diligence.
A deal that looks promising from the start may have hidden issues that can cost you thousands if not millions of dollars after you complete the purchase. Doing the proper due diligence into a company’s background and operations can save you from experiencing major problems and liabilities down the line. If you fail to do your due diligence, those issues can ultimately overshadow the value of the asset you just purchased.
At Holmes Business Law, we take due diligence seriously because it means protecting our clients. While you can and should do your own due diligence, it’s important to hire an experienced business lawyer to make sure you’re totally covered.
Why Due Diligence Matters
What happens if you fail to do the proper due diligence into a business asset purchase?
- You could purchase a property with major hidden environmental issues that can eat into your profits or even sink the value of the property outright
- You may lose important customers and clients after buying a business if you fail to have the proper non-compete clauses in place
- You might overestimate the sales price of the business asset
- You may buy a company that ends up in costly litigation over a legal issue
Due diligence is like hiring inspectors to check the foundations of a house before putting down a payment. If you fail to look under every part of the property, you could end up with an unfortunate surprise after the asset transfers to your ownership.
At that point, you’re likely to be stuck with the responsibility – and the bill.
Below is a general due diligence checklist with the first 8 of 16 items to cover your bases in a business or asset purchase transaction. At the end of the list, you can download a PDF of the full 16 items, formatted as an actual list to check off as you go.
For a due diligence review catered to your unique asset purchase in the greater Philadelphia area, call the Holmes Business Law offices now at 215-482-0285.
Business Asset Purchase Due Diligence Checklist
1. Organizational Structure and Standing
If you’re aiming to buy a company, you must first look at its basic foundations. Is the business entity filed correctly with all the proper licensing and good standing to operate?
If you’re buying a company, your foundational due diligence should include:
- Articles of Incorporation with amendments
- Bylaws including any amendments
- The organizational chart and staff list
- Minute book including stakeholder and director resolutions
- List of all shareholders and the shares they own
- Securities agreements detailing options, voting trusts, subscriptions, etc.
- A Certificate of Good Standing from the Secretary of State’s office
- Active status reports in the incorporated state covering the past 3 years
- List of all the company’s assumed names and brand registrations
2. Company Financial Data
A company’s financial health is one of the biggest factors in determining its value and purchase price. As a buyer, you must know exactly what you’re getting into, even if it’s not perfect.
Your due diligence should include the company’s:
- General ledger
- Company credit report
- Financial statements from the past 3 years
- Summary of all debts and contingent liabilities
- Summary of inventory, accounts receivable, and accounts payable
- Depreciation, amortization, and accounting methods
3. Physical Assets and Equipment
A company’s physical assets can add up and affect a company’s sale price. The physical assets may even be the primary subject of your purchase. To determine their value, you will need:
- A list of all the company’s fixed assets and their locations
- Any leases for office and operating equipment
- A list of all capital equipment sales and purchases over the past 3 years
- All U.C.C. filings that have a lien or security interest against the company’s assets
4. Employees and Employee Benefits
If you’re buying a company and you intend to keep it running, you need experienced and knowledgeable employees to help that process go smoothly. Payroll may also be one of your biggest expenses after the sale, so you must know what you’re getting into. You’ll need:
- Resumes of key employees who will remain after the purchase
- A list of all the company’s employees, including their positions, total years of service, and, salaries and bonuses paid over the past 3 years
- Copies of all the company’s employment, consulting, non-disclosure, non-solicitation, or non-competition agreements with employees and contractors
- The company’s personnel handbook
- A summary of all employee benefits such as holiday, vacation, and sick time
- Descriptions of company health insurance and retirement plans
- A full report of all employee complaints within the past 3 years such as alleged harassment, discrimination, or wrongful termination
- A summary of any labor disputes, arbitration requests, or grievance procedures at the company presently or in the past 3 years
- A summary of workers’ compensation and unemployment insurance claims
- Summaries of all employee stock purchase plans and options
5. Professional Engagements
A company needs good professionals to help it operate. Your due diligence should include:
- A list of any law, accounting, or consulting firms retained by the company
- Any other similar professionals hired by the company over the past 5 years
6. Real Estate Assets and Interests
Real estate is another major business asset with significant value. You’ll need:
- A list of all the places the company does business
- Copies of company real estate documents such as mortgages, deeds, leases, easements, title policies, land surveys, zoning approvals, variances, or use permits
7. Necessary Licenses and Permits
Local, city, state, and federal laws and regulations can make a huge difference on a company’s bottom line. Before purchasing a business, you should request:
- Any government licenses, permits, or consents
- Records of regulatory agency proceedings
8. Intellectual Property Rights
On the other hand, you may be buying a company primarily for their intellectual property, not for their physical or real estate assets. A brand, trademark, patent, or copyright could be worth millions of dollars – far more than a company’s other assets. You should check:
- The company’s trademark and patent filings both foreign and domestic
- A catalog of the company’s copyrighted work, if that’s part of the sale
- A list of any legal claims or actions against the company for IP infringements
These are just some of the items needed during the Due Diligence period.
For a full, business purchase due diligence checklist, download our FREE resource, “16-Point Due Diligence Checklist for Business Asset Purchases” at the link below!