Business purchase and sale transactions occur every day in New York and New Jersey. If you are considering the purchase of a business you are, most likely, searching business listings and speaking with brokers and business owners with the hope of finding the “right business” that may be purchased at a fair price and serve as a foundation for you future. Basically, there is much at stake and, as a potential purchaser, you must engage in a detailed and organized “due diligence” investigation that should be coordinated and discussed with your business lawyer.
“Due Diligence” refers to the all important investigation that a business buyer must undertake before risking his or her capital and committing to a business contract. While the specifics of your due diligence investigation will vary depending on the business you are buying – for example, car washes and gas stations involve unique due diligence factors that are not relevant to restaurants and service based franchises – in each and every business transaction, your due diligence investigation will include an evaluation of the following business assets:
These “tangible assets” are simply the physical assets used by the business in its day-to-day operations and include things (depending on the type of business) such as computer systems, refrigeration units, tables, chairs, storefront buildout, vehicles and point of sale systems. Among many other things, the purchaser must evaluate the condition of these assets and insure that these assets are not encumbered or subject to a lien when they are transferred and sold.
The location of the business that you are buying, in all likelihood, will be one of the biggest factors in determining your future success. Since most businesses operate from a “leased location” you must consult with and speak to your business lawyer about the terms of the lease and changes that may be negotiated with the landlord. Keep in mind that the base rent and additional rent set forth in the lease will have a direct impact on the profitability and cash flow of your business.
The income and earning potential of a business is sometimes referred to as “goodwill” and is an “intangible” asset. To properly evaluate this intangible asset, among other things, you should consult with your business accountant and engage in a detailed evaluation of the seller’s financial information, including tax returns, financial statements, invoice receipts and sales tax returns.
While you must view the due diligence process as a “continuing investigation process’ there will come a time where the Seller – out of a legitimate concern protect his or her business – may demand that you sign an agreement and pay a contract deposit. If this is the case, you should speak to your business lawyer about adding a “due diligence contingency clause” to your purchase agreement. This clause will provide you with a fixed time to undertake and complete your investigation. If drafted properly, this clause will permit you to cancel the agreement and obtain a refund of your contract should you not be satisfied with your investigation, i.e., the business does not generate the cash flowed claimed by the seller.
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