Recently, I was approached by a prospective client about selling a small business, and I asked if she knew what performing a "due diligence" was. The blank stare on her face was all the answer I needed. Many small business owners have heard the term, but know nothing about what it means to properly carry out the due diligence process.
“Due diligence” is a period of time during which a prospective buyer has the opportunity to investigate your business before completing the purchase. During this phase of the business purchase, a prospective buyer can research the company’s business via the financial statements, assets and liability statements, contracts and inventory. The purpose is to determine if what is represented about the business is true and often to arrive at a fair price.
This is a sensitive time in the sale process because you are providing a stranger access to confidential aspects of your business that need to be handled with care.
Preparing your company for a "due diligence" is basically getting your "ducks in a row," and getting your "house in order" all at the same time. Gather the following documents together and get together with your attorney to put all matters in order:
- Organizing Documents: Whether your business is a sole proprietor, partnership, corporation or limited liability company, put your organizing documents together (including your certificate of organization, bylaws and all filings made at the NY Department of State. If you don't have these documents, check with the NY Department of State to get certified copies. And while you are there, check to see if your New York business remains in good standing. If it isn't, then get it into good standing before proceeding.
- Real Estate: If you have any rights to real property (deeds, leases, and other agreements), then gather the documents together and hand them off to your attorney to verify that your real estate is free from liens and encumbrances.
- Insurance: Provide proof of adequate coverage for your properties and your business itself. This is key if your business involves vehicles or transport.
- Licenses and permits: Include all documents for all licenses for the business and for operators personally. If you run a food service business, buyers should know that your personal licenses, like for food handling, are non-transferable. However, other licenses, such a liquor licenses, can be transferred with the business - under certain conditions.
- Agreements: This means all major contracts with customers and third party vendors and creditors. Have an attorney review all of these agreements to ensure that they are assignable to successors in interest before a buyer takes a look.
- IP: Beyond your logos and branding, put together your proof of any patents, copyrights, trademarks and confidential trade secrets - but only provide them to the buyer after the buyer has agreed to keep this information confidential.
- Financials: Prepare tax returns, profit and loss statements, bank and other financial statements. Keep in mind that in New York, business successors may be liable for tax debt incurred in the years before the purchase of the business, so buyers will want to see prior federal, state and local tax returns and financial records going back several years.
- Assets & liabilities: This includes any inventory, cash and securities, receivables, commercial property like equipment, as well as revolving debt, overall debt, employee lists with salaries earned and owed, information on pending lawsuits, and all regulatory violations paid and outstanding.
At the same time, the buyer should be prepared to provide you with the following:
- Credit history for principal and business;
- Buyer’s bio and resume;
- A proposed business plan after sale; and
- Financial information for both the principal and the business.
Additionally, have your attorney research both the principal and the business for court filings and other red flags that may upset the deal.
Buying and selling a business is not a simple matter. Regardless of which side of the transaction you find yourself, having an attorney guide you through the process will make it all the smoother in the end._____
*Gene Berardelli may be contacted at: GeneBerardelli@ipglegal.com.
Gene is a New York street-smart attorney with an extreme passion for success. Gene specializes in litigation, arbitration and general corporate law for New York-based and international clients. He, also, is the host of a popular New York talk radio program.