4 questions to ask when buying a business
When you decide to buy a business, information comes at you like a fire hose.
There are four critical legal questions to investigate as part of a business purchase. Taking the time to understand how these legal pieces fit into the ongoing operation of your business can save many headaches down the road.
What am I buying?
It may seem like a straightforward question (I’m buying the Acme Widget Company!), but there are a million and one different variations on how to actually structure the sale. Are you buying the stock of the company, or are you buying its assets? Are you buying just the business assets, or also the real estate? What liabilities are you assuming, and which are staying with the seller?
It’s important to understand from the very beginning exactly how the purchase is structured, as well as the tax implications that go along with the deal.
Has the seller paid all its taxes?
On a practical level, if your due diligence investigation discloses the seller has outstanding tax obligations, or has not filed the proper tax returns in the past, it raises a red flag that there may be other issues going on inside the business.
If the business being sold has employees, Michigan law requires a business seller to disclose its recent unemployment insurance agency payments. And it is important that you obtain a certificate of tax clearance from the state of Michigan as part of the closing process.
Will all the contracts and leases be assigned?
If the business being sold leases its space, many commercial leases contain a provision that the tenant cannot assign its lease without landlord consent. If an asset sale occurs and a new business is taking over the lease, it is very important to obtain approval for assignment of all contracts and leases before closing.
What am I personally guaranteeing?
I am amazed how often struggling business owners do not understand what debts they are personally responsible for. It’s imperative that you know up front what business obligations may need to be paid out of your personal assets down the road.
If you are obtaining a commercial bank loan or Small Business Administration loan to fund the purchase, it is a given that you will be required to personally guarantee the loan. And the IRS will definitely find you for unpaid taxes! But some of the other obligations of your business (such as equipment or real estate leases, vendor lines of credit, or credit cards) may or may not have a personal guarantee requirement.