Buying a Business Checklist

 This Checklist is prepared by [Buyer] on [Date] for the business [Target’s Name].

I. Finding and Evaluating an Acquisition Candidate

A. Research
For those who have not already identified a business to purchase, this may be the most difficult step.  Following are possible sources of information about businesses that may be for sale:

Classified advertisements.  Check not only your local newspaper, but also business publications and trade publications in industries of interest.

Bankers, lawyers and accountants.  These and other professional advisors may have clients or customers who are interested in selling their business.

Industry sources.  If you have identified an industry in which you would like to purchase, check with trade associations and other groups where members of the industry come together.

Business Brokers.  There are many reputable business brokers.  Investigate the reputation of a broker before you make contact.  Remember that these entities usually work on a commission paid by the seller from the proceeds of the sale.  Consequently, some brokers are primarily motivated to complete a sale at the highest possible price, regardless of whether the transaction makes sense for the buyer.

Internet.  Countless sites are available with information about businesses for sale.  Many are run by brokers promoting their inventory of businesses or listing services that accept a fee from the seller for the listing.

Vendors and Suppliers.  Many companies in the business of selling goods and services to other businesses hear about companies that are for sale.  Develop contacts with those that supply to the industry in which you are interested.

B. Evaluate
Once you have a candidate, you should contact the owner to make an initial inquiry. Either or both of the owner and you may want to have a non-disclosure agreement.  Business Attorney includes a form you may find useful.

Remember that employees of the candidate business may not know that the owner is considering a sale.  Do not discuss the purpose for your contacts with the owner until authorized to do so.

Consider asking for financial records, including tax returns, market and sale plans, projections and important contracts.  Involve your professional advisors where needed to review these items.  The owner may not agree to share some or all of these until satisfied that you are a legitimate prospect to purchase and negotiations have progressed.

It is important for both parties to be realistic about valuing the business.  Consider assistance from an appraiser, accountant, banker or other knowledgeable advisor.  Don’t make the mistake many buyers do: Appraising the value should be based on assets or earnings, but not both.  Buying the assets enables you to acquire the “engine” for the earnings.  Don’t “double-count” through a valuation that includes both assets and earnings components.

II. Offer and Contract Negotiations

A. Offer
Once it appears that both parties are interested in a transfer of the business, the buyer will usually make an offer.  The offer should be “informal”, meaning that the price and other terms are generally agreed to, subject to completing a final, binding purchase agreement.  Be sure that any offer letter (often called a “letter of intent”) includes language that makes clear the offer is not binding until a final contract is signed, for example: “This letter expresses the intent to complete a transaction as outlined herein, but no binding commitment shall be made by either party until a final, written agreement is signed by both parties.”

Ask the seller to confirm his or her intent to sell according to your proposal in writing.

If financing is necessary, the seller should make the deal contingent on specifying necessary financing.  Consider financing through the seller and/or S. B. A. financing.

Will the offer be for an asset purchase or a stock purchase?  A stock purchase means the buyer buys the existing corporate business owner by purchasing all of the stock representing ownership of the corporation.  An asset purchase means buyer will actually purchase some or all assets of the business that are needed to run it.  These may include equipment, real estate, tools, inventory, trademarks and copyrights, contracts, customer lists, and telephone numbers.  Generally, sellers prefer stock purchases and buyers like asset purchases.

Will seller or any of its principals be asked to stay on as a consultant to help in the transition?  See the Business Attorney Independent Contractor (Consulting) Agreement for help.

B. Negotiation
When the informal, non-binding offer is accepted, it is customary (though not universal) for the buyer to prepare a draft agreement.  Business Attorney has a form of Asset Purchase Agreement with helpful information.  Make sure your attorney reviews any agreement before you send it to the other party for negotiation.

Allocation of the purchase price among the items to be purchased is a matter of negotiation.  The IRS will normally accept an allocation made in arms length dealings, but retain records to support the final allocation.  Buyer is often most concerned about allocation to maximize tax deductions for expenses and depreciation through asset purchase.

Tax consequences should be an important consideration in any sale or purchase for both parties.  These are a few areas to investigate:

–  Internal Revenue Section 453 allows “non-dealer” sellers to use this deferral method to spread out tax payments due on gains from the sale.  It cannot be used for sales of inventory.  At least one payment must be received after the close of the taxable year in which the disposition occurs.

–  If buyer will not operate as sole proprietor, buyer must determine what kind of entity may need to be created to own the business: Partnership, Corporation (including “S — Corporation”), or Limited Liability Company.

–  Seller should also consider tax strategies.  For example, for corporate sellers, the tax code provides that shareholders may get some tax relief through a complete liquidation following a sale of assets. See Internal Revenue Code sections 331 and 337.

–  If a corporate seller has significant operating losses, a buyer may prefer a stock purchase.  This enables the new owner to take over the existing corporation and, when profitable, shelter income with the old losses.  Determine if carry back or carry forward credits are available. Discuss with an accountant or lawyer.

III. After the Contract

Once the contract is signed, the buyer must take “due diligence” to ensure that the purchase can be completed as planned and that there will be no problems after ownership changes hands.

Buyers should carefully check the condition of assets to be purchased.  Consider building and termite inspections, and equipment tests and other review of physical assets.  Also, talk to vendors, service personnel and others to verify any seller claims.

Buyers should carefully review and analyze financial statements and tax returns with their accountants.  If audited statements are available, obtain them.  Determine if items in the tax return look suspect, which might give rise to penalties for fraud or negligence.  Ascertain if seller has been under audit or if seller currently is undergoing one.  Pinpoint any substantial changes occurring between the date of execution of the purchase contract and closing, or since the date of the latest financial statements.

Address any concerns about seller’s creditors.  This may mean that buyer must get a list of creditors of seller and make sure all will be paid before closing.  If they will not be paid, buyer must make sure there will be no liability to seller’s creditors after closing.  Buyer should consult an attorney for assistance.

Seller should furnish buyer with tax clearance report for state taxes.  Be sure to consider all states where taxes should be collected and paid.

Buyer should obtain written approval from landlord if seller’s lease of the business premises will be assigned.  Ascertain that lease is not in default and renewal options have been exercised.  Consider transfer or other handling of security deposits.

Will seller’s receivables accounts be assigned to buyer?  If so, investigate these accounts.  Are they collectible?  Are any subject to dispute or set-off?  How old are they?

Are customer lists current and accurate?  Buyers should talk to customers, at least key ones.  Is business dependent on a few customers?  Are they related to the seller?  Can customers be expected to continue to do business with the buyer?

Is seller’s relationship with suppliers good?  Will they continue to extend credit on same terms to buyer?

Make sure all necessary licenses, permits, and governmental approvals can be transferred.  If they can’t be transferred, will new ones be granted?

Check and review miscellaneous contracts for terms and to ensure they are still in force.  Can these be assigned without the other party’s permission?  Also review (if any) with your lawyer:

– Employment Contracts with key employees

– Pension/Profit-Sharing Plans

– Labor contracts

– Franchise agreements

– Stock purchase agreements

– Contracts with customers or suppliers

Are there any laws or regulations pertaining to the particular business?  Will zoning be affected by the sale?  Is property threatened by condemnation?

Check any copyrights, trademarks and patents that will be acquired for validity, infringing uses and expiration.

Did seller maintain adequate insurance to cover any potential claims?  Buyer should be certain to have insurance in full force at closing.

The contract should specify which liabilities (if any) are to be assumed by buyer, and which ones will remain seller’s responsibility.

– Current Liabilities and Debts – Obtain verified information about each.

– Pending Claims/Contingent Liabilities – Obtain letter from seller’s attorney verifying litigation and claims.  Carefully review and account for these.

Are there any outstanding unsatisfied court judgments against seller?  A significant number of judgments may make buyer wary.  Make provision for how claims and judgments will be handled.

Check for liens on seller’s property with the Secretary of State and Recorder of Deeds in county in which seller’s property is located.  Use form UCC-11 Request for Information.  If real estate will be purchased, title insurance company will check for liens on real estate.  Be certain to have liens released.

Check with Recorder of Deeds in seller’s county for any income tax liens.  Beware of an unrecorded lien for estate taxes if seller in an estate.  If such is the case, obtain an estate tax closing letter, if possible.

Are bankruptcy proceedings pending against the business or its principals?  If so, your concern is obvious.

Buyer will likely to obtain a variety of tax numbers and registrations: Federal I. D., state sales tax, withholding and unemployment taxes are primary concerns.

IV. At Closing

Closing is the event where the ownership of the business changes hands as provided in the sale contract.  This means that seller and buyer must each be sure that each and every obligation of the other has been properly completed.

If buyer receives a Non-Competition Agreement from one or more of seller’s principals, it must be reasonable as to time and geographical location in order to be enforceable.  Buyer will often want seller to be subject to such a covenant.

If a broker is involved, commission will be due.  Be certain it is paid or addressed otherwise.

Review bill of sale to transfer personal property, and be certain that all items are included and clearly identified.  Items transferred by bill of sale may include inventory, machinery, equipment, office furniture, supplies and goodwill.

A General Warranty Deed for real estate purchased should be executed and recorded to transfer realty. Obtain owner’s title policy for buyer.  Seller should consider obtaining mortgagee’s policy if seller is financing any part of the real estate.  If buyer will assume existing lease, make sure all necessary consents are in place.

If motor vehicles are purchased, make sure titles are transferred to buyer.

Corporate officers and spouses should guarantee all warranties, representations, and covenants in contract.

If seller finances any part of the transaction, the buyer and spouse may be required to  personally guarantee payment, especially if other security is not adequate.

Seller should be sure to perfect lien on property if seller financing is involved.  This is done by filing a UCC form 1 Financing Statement.

Obtain necessary shareholder approval and director approval of corporation or approval of partners if partnership or joint venture is seller if substantially all assets are being sold.  Seller should also obtain certified copies of proper resolutions of buyer.

Buyer should carefully review the corporate records, and pay particular attention to:

– Articles of Incorporation

– Minutes

– By-laws

– Stock Certificates

Both buyer and seller (if incorporated) should have certificate of good standing for other party.  These should be requested from appropriate state office approximately one to two weeks prior to closing.

If closing is in escrow, prepare detailed escrow agreement with clear instructions.  Provide for payment of escrow fee.

Seller may insist on cashier’s or certified check for funds to be paid by buyer at closing.  Buyer should try to have portion of price retained (or financed) to provide off-set protection for possible claims.  Buyer should consider withholding sufficient amount to cover sales taxes (and interest and penalties) which may be due from seller, until seller produces receipt for payment of Department of Revenue.

Go through the entire contract, including Exhibits, and be certain that everything has been completed.

V.  After Closing

After the deal is closed and ownership has officially changed hands, a few “clean-up” tasks remain for both parties.

Corporate seller should change its corporate name and relinquish any fictitious name registrations if assets are purchased.  Similarly, buyer should register its name with Secretary of State as a fictitious name, if necessary.

Transfer gas, electric, telephones and other services.  Obtain necessary keys and consider changing locks.

Seller may be required to file final tax returns.  Seller must usually file final sales tax return within time limit following termination of business.