“Due diligence” is the period of time during which a buyer has the opportunity to investigate a business before completing the purchase. During the due diligence phase, the buyer can research the company’s financial statements, assets, liabilities, inventory and contracts to confirm the seller’s representations about the state of the business. Because due diligence requires a seller to disclose certain confidential aspects of the business, such as trade secrets, you should only go through the process with buyers who have already committed and agreed in writing to a certain price and terms.
In order to ensure that everything runs smoothly, the seller should be prepared and organized. Although it is not the seller's job to perform due diligence for the buyer, any documents that the buyer might request should be readily available. Buyers faced with a disorganized business owner may become skittish about closing the deal.
Before the due diligence phase begins, the seller should prepare the following documents with an attorney:
- Corporate or LLC Documents: Including the certificate of incorporation, certificate of status (good standing), articles of organization, operating agreement, by-laws, shareholder agreements and any outstanding option agreements. New York businesses can order a certificate of good standing here: http://www.dos.ny.gov/corps/index.html.
- Contracts: Prepare all major contracts, including distributor, supplier and customer agreements, confidentiality and non-compete agreements and equipment licenses. Buyers will want to verify that these contracts are transferable to a new owner.
- Real estate: Prepare any real estate leases, purchase agreements, mortgages, title insurance policies and any liens against the property. Buyers will want to know whether the property is transferable and whether there is sufficient time remaining on existing leases.
- Insurance policies: Buyers will want to ensure that the current coverage is adequate for the business as it is conducted.
- Licenses and permits: For example a liquor license. Include any documentation relating to renewals.
- Inventory list
- Intellectual property: Including any patents, copyrights, trademarks and trade secrets (such as recipes, customer lists, and supplier lists).
- Financial documents: Prepare tax returns, financial statements, and tax liens. In New York, business successors may be liable for tax debt incurred in the years before the purchase of the business. Buyers will usually want to see between three and five years prior federal, state and local tax returns and financial records.
- List of assets and liabilities: This includes any cash, securities, equipment, debt, employee bonuses earned and not yet paid, pending lawsuits, licensing violations and outstanding environmental violations. Also, prepare a list of all employees and their current salaries.
Maintain Confidentiality Throughout the Due Diligence Phase
If for some reason, the transaction falls through, the prospective buyer will have accessed confidential information about trade secrets. To ensure confidentiality, have the buyer sign a confidentiality agreement. Keep a log of all documents provided to the prospective buyer and confirm that they have been returned.
Conduct Due Diligence on the Buyer
When selling a business, the seller must place a good amount of trust in the prospective buyer. Sellers are advised to:
- Check the buyer’s credit history
- Inspect the buyer’s business plan
- Review the buyer’s resume
- Seek input from third parties who have prior experience dealing with the buyer (check references)
- Check court records to determine whether the buyer has been sued as a result of any prior business dealings.
- Review the buyer’s financial statements
Brooklyn Business Lawyer Regina Gordon Assists Businesses Prepare for and Conduct Due Diligence
If you are thinking of selling your New York business, Regina Gordon Law Offices can help you facilitate a smooth transition, while protecting your own interests as a seller. We serve clients online throughout New York State, including Long Island, New York City (NYC), Brooklyn, Manhattan, Queens, Bronx and Staten Island. To discuss your goals with a Brooklyn business lawyer at Regina Gordon Law Offices, contact us at 347-770-7507 or submit an online inquiry today.
This post is for informational purposes only. It is not intended to be, nor should it be construed, as legal advice. Always consult an attorney, licensed in your state, before taking legal action.