Doing Your Due Diligence – Or Else!

Buying or selling a business? You’ve got to do your own due diligence or you could find yourself in litigation.

“Due diligence” is the process by which you make sure you are getting the benefit of your bargain in a contract. In its most simplified form, it’s like inspecting the goods before you take them to the cash register. Or, if you’re the seller, making sure that the $100 bill the customer paid with isn’t counterfeit. Because once everyone walks away from the transaction, you’re stuck with what you’ve got.

It’s a bit more complicated in an asset purchase or stock sale. If you are buying a business you have to be sure that the business is as good as promised, and that it is sustainable without the current owner before you plunk down your life savings and/or a personal guaranty on a promissory note. If you are selling your business, you want to make sure that the buyer’s due diligence is thorough. If you are holding the promissory note (or guaranteeing a promissory note for the buyer), you have to be certain that the buyer is going to repay the note.

You can’t simply rely on a commissioned business broker. This is one time that you have to hire a lawyer who represents your business’s best interests.

We see all too often what happens when either buyer or seller fails to conduct proper due diligence. The buyer sues the seller for failing to make material disclosures about the financial condition of the business (or other material matters). The seller countersues the buyer for failing to make payments as promised. We end up at the mediator’s office trying to settle the whole matter out of court, and everybody loses but the lawyers.

So how exactly do you prevent litigation when a business sells? Start by knowing with whom you are dealing. Spend some time with the other party to the transaction. Make sure that you are on the same page. Know what each other expects out of the deal.

Next, evaluate the financial picture. Look at the other party’s tax returns and bank statements for at least 2 or 3 years. Look at the business’s balance sheet, profit & loss, accounts payable, and accounts receivable. Look at the buyer’s credit report.

Then look at the assets. Did you buy the seller’s contracts with existing customers? If so, are the contracts assignable? Are you getting what you paid for? Inspect any leased premises, and make sure you get a copy of the current lease. Inspect any furniture, fixtures, and equipment you are buying, too.

Finally, make sure that any business entities are properly formed, that all the corporate documents are in order, and that they are in good standing with the State. Make sure that the parties are authorized to enter into the transaction.

Most of our clients prefer to do some of their own due diligence, but almost all ask that we review any contracts, corporate documents, and closing documents prior to closing the sale.

Looking to buy or sell an existing business? Talk to one of our attorneys at 407-792-0790.

Meehle & Jay and Suzanne have been our counsel for Echo Interaction Group since the inception of our company. Her guidance has gone above and beyond the typical small tech business attorney and she's become a trusted advisor to our firm. Her knowledge of small business legal needs and specifically in the technology and startup world have been crucial to the growth of our company.

Carlos Carbonell, CEO, Echo Interaction Group

I couldn't be happier with my decision to hire Meehle & Jay as our entertainment attorneys!  When you deal with a lot of people, it's critical for a business to have all of their i's dotted and their t's crossed, and it's huge relief to know that Meehle & Jay is doing that for us.

Rob Henlon, Fierce Entertainment 

I use Meehle & Jay to represent my Event Planning Business and they are nothing short of phenomenal. Not only do I get email reminders to make sure I am staying on top of my legal priorities, the professional advice they have offered me, in conjunction with their legal expertise, makes me feel confident that I can do business competitively while still having my assets and reputation protected.  A class act all the way around.

Michelle Widmer, Founder & Director of Events, The Empress Table

Davey Jay handles all our company's copyrights. Excellent knowledge and response time, highly recommend this firm.

Rodney E. Luke, President, Luke Brothers Custom Homes

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