VanAntwerp Attorneys, LLP
Phone: 606-618-0698

What constitutes due diligence when buying a business? Part 2

In our last post, we began a list of due diligence questions to ask when purchasing an existing business. Today, we add additional examples of what you should cover to ensure you aren't taken by surprise.

What product and service lines are there? Gain a thorough understanding of existing, developing and legacy products and services offered by the company, along with any warranties, regulatory approvals or disapprovals, tests, studies, surveys or major complaints.

What vendor/material supplier contracts exist? Are there subsidiaries, affiliates, partnerships, joint ventures or other obligations? Get copies of all contracts to which the company is a party, especially any loans, financing agreements, promissory notes, guarantees, mortgages, and stock transactions. Get copies of all standard contracts, quote forms, purchase orders, invoices, warranties and other standard paperwork.

What professional services are required? Request a list of any law firms, accountants or other professionals the company has worked with in the last five years.

Who works there and what are they owed? Develop a detailed understanding of your key staff, their salaries, the bonuses they have been paid, and any relevant nondisclosure, non-solicitation, and noncompete agreements. Also view any collective bargaining agreements, labor disputes and employee complaints. Be sure to understand employee benefits, particularly stock options.

What are the employment rules? Get a copy of the employee handbook and personnel policies.

Who are its largest customers? Obtain a schedule of the company's 10 to 12 largest customers and a description of all sales to those customers over the past two years.

Is it up to date on its taxes? You should obtain state and federal tax returns, along with any excise tax filings for the past three years. Crucially, examine all employment taxes that should have been paid. Also find out about any audits, tax liens or tax settlements the company has been involved in.

Is its insurance up to date? You should receive copies of all insurance policies, including general liability, product liability, errors and omissions, personal and real property, key employee, officers and directors, workers' compensation and other policies. You should also get a history of claims over the past three years.

Is the company involved in any disputes or litigation? Is any litigation pending or threatened? What is the probable and maximum risk? Has the company satisfied all past judgments? Is it involved in any consent decrees, settlements or injunctions?

Has the company been in the news? Request copies of all articles and press releases related to the company that have appeared over the past three years.

Although this is not a complete list, it should give you a fair idea of the scope of due diligence and the level of detail you should expect.

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