Business Article - Due Diligence
Okay, so things are going well with your business and you have made so much money that you can live comfortably for the rest of your life. You are growing tired of the business, for one reason or another, and have been contemplating selling. Can you just take a flat fee and sign everything over to an interested buyer? The answer is simple; no. It is possible to do business in that manner but it is much wiser to protect yourself from any responsibility if trouble should arise later. Your money is at stake but so is your good name and a good name still holds invaluable power. If something should occur after you sell your business that could have been prevented simply by disclosing the information you could be held financially liable.
If you are planning to sell, it is highly important for you to make sure that you have everything in order with your business. This is called Due Diligence. It is basically ensuring the fact that you reasonably attempted to provide another interested party with all of the information about a business or piece of property so that they may make an informed decision. It releases you from any responsibility later if something should occur. Many resources exist to help a business owner prepare to complete due diligence and with proper research and knowledge your interests should be soundly protected but where should you begin?
Real and Personal Property
Real and personal property needs to be disclosed prior to the sale of a business. If you want to sell your business to another individual or entity the party should be aware of exactly what it is that they are going to receive in this deal. There are a few common areas of concern that come with determining what is real and what is personal. The items that are personal are generally sold only if they are disclosed in the agreement and the items that are real consist mainly of the actual land and dwelling or building that sits upon it.An easy way to figure out if property is real or personal is to consider what is supposed to be in a building when you purchase it. There should be walls, a roof, furnace and air unit, water heater, floors, windows, pipes, etc. Those items are basic. Now what about a stove or refrigerator? Are these items included? The answer depends upon the contract disclosure.
If the building has a built in stove or oven it should be considered a permanent fixture of the property but if it is disclosed prior to the sale that it will not be accompanying the building, it may be removed by the former owner either prior to or within a reasonable (and disclosed) time limit after the sale. If you rent a building and it is being rented out to a business that is using it as a bakery and there are ovens, stoves, shelves, etc. attached to the building this furniture and equipment could be considered “trade fixtures” and should legally be removed on or before the last day the property is rented. If it is not removed by the last day of rental, the property then becomes the property of the building owner. It is important for ownership of these items to be disclosed because the buyer may legally assume (if not disclosed) that when they purchase the business from the seller that this furniture and equipment is included in the sale.
Insurance and Liability Coverage
When selling a business, the buyer wants and needs to know what types of insurance the business currently has in place. This includes any insurance on the property, the product, and the employees. Many businesses hold several types of insurance policies for several reasons.Property insurance is held by business owners to protect the building, the fixtures, machinery, office equipment and furniture, and supply and inventory. The most coverage can be obtained by purchasing a special policy and the least with a basic policy.
Directors and officers liability insurance protects the business from legal claims that may arise due to wrongful acts committed or performed by officers or corporate directors while performing their duties to the company. These acts include misstatements, errors, omissions, breach of duty, and neglect. Any of the officers, corporate directors, or the company itself can be sued for these wrongful acts. Insurance policies typically cover these acts if the claim arises during policy coverage. If the act occurred in 2004 but the claim was just filed and the company is under policy, they are protected. EPL coverage can also be purchased in combination with D&O insurance to have a broader range of coverage. This type of coverage protects against sexual harassment, wrongful termination, failure to promote, discrimination, and other violations of employment laws.
A release form can be a potentially helpful document when it comes to certain businesses such as skydiving instruction, horse stables, hot air balloon rides, etc. If the customer is asked to sign a release form before using the product or service, the customer that tries to sue later for something that they knew could potentially occur during the activity has less of a chance of harming the company in any way. Remember, minors may not sign away their rights. A parent or legal guardian must sign for them and if that is not done a company may be liable for any injury that has occurred.
Vehicle insurance for any company vehicle is required by law. It protects any company employee from potential financial damages if they are involved in an accident on company time in a company vehicle or a vehicle that is used for company tasks.
Health, life, dental, vision insurances, etc. are all types of insurance that the company currently provides for its employees, officers, and corporate directors. This coverage should be disclosed before the sale of the business so that the new owner may either institute a new policy or continue existing coverage’s.
Other employee benefits including paid time off, discounts, points, etc. should be disclosed prior to the sale of a business so that the new business owner can institute or continue practice. This ensures that the business does not close its doors immediately after the sale due to inability to produce or run the business safely and properly. If a business owner is able to keep the employees happy it helps tremendously in keeping a business afloat.
Any obligation by the former company to the consumer or the bank is considered a debt obligation. This includes such instruments as services, loans, bonds, taxes, supplier costs, etc. It should always be disclosed prior to the sale of the business. It is not considered fair practice to sell a business without informing the potential buyer of the financial burdens that lie ahead.
Labor matters such as who is a member of a union and who can be should be disclosed. Also, practices within the workplace and current company guidelines for employees are important for disclosure. Knowing how a former company handled its employees can aid a new company in keeping employees comfortable with the change of hands process as well as improve the working environment of the employees if the new owner deems those regulations and policies were not substantial enough for the employees to work with. Federal and state laws govern labor laws and it is always important to keep a copy of those laws that govern your area handy so that they can be disclosed at will.
Any internal transactions within a business should be disclosed. Interdepartmental sales, transferring of resources, balance sheet transactions, revenue, salary expenses, and non salary expenses should all be present and accounted for when selling any business and should be able to be produced by the accounting department or accountant. This is information that is detrimental to a potential business owner if not disclosed because if the new owner is not aware of the costs, they may not be able to afford them or allot the monies to pay these costs in a timely manner. Again, the accountant should have records on file and ready to produce should the need arise.
International transactions are helpful to business owners who do high volume sales for various product lines. The international market offers vast areas of possibility. If a business can provide a product or service that is needed all across the world, it would be financially beneficial to sell it to everyone across the world. International sales and transaction information should be disclosed so that the new business owner may see the possibilities of the business. It also aids the new owner in deciding who to sell to and the history of the relationship with the international consumer.
There are several checklists available either online, at some office supply stores, and through attorneys and insurance agents for the purpose of due diligence to make sure that your business affairs are in order before the sale. Real estate agents and brokers should also have these forms available for your use as they are required to provide due diligence in their profession. Keep in mind that the form is much longer and more detailed than what you have just read. This is just a basic building block in obtaining all of the proper information to have in order for a potential buyer.