Due diligence before buying a business is the process of reviewing financial records, contracts, legal compliance, and operational risks before committing to a purchase. Buying a business is not just a financial decision; it’s a legal commitment that can impact your future for years to come. It does not matter if you are looking to buy a small service-based business or a franchise operation; due diligence is your safeguard against hidden dangers, liabilities, poorly written contracts, and costly surprises. At Anderson Law Firm, we help business owners uncover what’s beneath the service before they sign their names to a nightmare deal.

What is Due Diligence in a Business Purchase?

Due diligence is the process of investigating a business before finalizing the purchase. Think of it as your “legal and financial background check” to confirm that what you’re buying is exactly what was promised. Skipping due diligence can leave you with unexpected debts, staff that are not good fits, unresolved lawsuits, or assets that aren’t truly yours.

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The Legal Due Diligence Checklist

1. Review ALL Contracts

From vendor agreements and client contracts to employee agreements. Every contract should be reviewed for hidden obligations, duration terms, and transferability. You will want to know what agreements will be in place during your ownership and what may end before you purchase.

2. Confirm Ownership of Assets

Verify, verify, verify! You confirm that the business truly owns all of the assets listed. This will include intellectual property assets such as trademarks, copyrights, and any other proprietary processes. If the IP is not transferable, you could end up paying for rebranding or losing access to a key competitive advantage. Learn more about intellectual property frequently asked questions.

3. Examine Business Licenses & Permits

Make sure the business holds all required licenses for its operations and location. Some licenses may not be transferable and could require reapplication. Some licenses may require you to hold a special education license BEFORE you can make an offer for those businesses. For example, in Florida, only licensed attorneys can own a law firm.

4. Audit Employee & Contractor Agreements

Review all of the employee contracts and independent contractor agreements. Determine who will remain and who will not if you purchase the business. Do they know about the potential sale? Review non-compete, non-disclosure agreements. Lastly, be sure to identify any pending disputes and claims that could impact the operations after a purchase.

5. Evaluate Financial Records for Legal Risks

While accountants or a forensic accountant will assist in discovering profitability and other financial leaks, a business attorney will assist in looking for red flags in tax filings, past or pending (active) litigation proceedings, liens, and any debt obligations. The U.S. Small Business Administration outlines common records buyers should review when conducting due diligence before buying a business.

6. Verify Compliance with Laws or Regulations

You want to ensure the business’s operations are in good standing. This can range from data privacy to industry-specific compliance components, such as whether a medical practice has malpractice insurance. Did they have workman’s compensation insurance? Did they register the entity and maintain the entity in good standing?

7. Assess Pending or Threats Against the Business

When assessing whether they are pending or threats to the business, some may take the form of actual legal proceedings, while others may involve administrative issues at the county, state, or federal level. The majority of the administrative inquiries or issues are not published until after they have been resolved. Lastly, knowing that a pending threat could become your responsibility, it should be reviewed and investigated immediately!

Why Skipping Due Diligence is a No, No!

Without proper legal due diligence, you are essentially marrying your blind date with a blindfold on. You could inherit hidden problems, disasters, and worse, a financial pit that you cannot get rid of. If this scares you, good! It should serve as the wake-up call you need to move beyond emotions and operate in a data-driven mindset. It’s often cheaper to say no than to say yes and wish you could find a time machine and turn the yes into a no.

We frequently guide small business owners through the due diligence process with approachable strategies. Deciding to buy an established business means you could be buying a headache or a goldmine – the only way to know is to look and see what’s really there. Our firm will make sure your investment is a sound decision for you and ensure your future can be secured with this potential opportunity.

Here’s What We Get Asked The Most About Due Diligence

Now, over the years, business owners have asked our firm many of the same questions before buying a business. To help you get answers quickly, below are the questions we hear most often during the due diligence process.

Ready to protect your investment?

Conducting proper due diligence before buying a business helps buyers make informed decisions and avoid costly surprises after closing. If you would like support with due diligence before you buy a business, schedule a Legal Strategy Session to review this opportunity with real confidence.