A business sale transaction has so many complexities, and it can often be overwhelming to first-time or even experienced business buyers. Due diligence is the responsibility of the buyer to conduct. It is the buyer’s chance to ask the seller for any financial or operating documents that they need to verify the financial performance of the business. It is also the buyer’s chance to ask any and all questions that they’d like the answers to. If the buyer chooses not to hire an attorney or CPA who specializes in business sales to help them through due diligence, then the burden of deciding which questions to ask falls solely on them.
Based on our experience as business brokers in many transactions over the years, we thought we would offer some insight with questions that buyers often forget to ask, but then could possibly become an issue down the line. This list of questions is not intended to be a full and complete list of due diligence questions, nor can we as business brokers provide a list of any and all due diligence questions, because every business sale transaction is unique and will require different questions, based on the situation. It is the ultimate responsibility of the buyer to decide which questions should be asked of the seller during their due diligence. It’s recommended that buyers consult a CPA or attorney who specializes in business sale transactions to assist them, should they require help with questions.
Here are 10 questions that buyers often forget to ask or important items that sometimes get forgotten during the course of a business sale transaction.
- Buyers need to understand intellectual property and/or licensing that is either included with the sale or is needed to operate the business. If there is intellectual property, like a Trademark for example, buyer needs to understand how the assignment process works to transfer it. If it is licensing that they will simply be given permission to use (like a business name or branding) and not owning, then they need to know what the royalties or fees are going to be. There will also often be specific rules for users of the licensing, so make sure to understand those as well.
- If a buyer is purchasing a franchise, they need to have a full and complete picture of what the franchise agreement entails. That is part of the reason a “Franchise Disclosure Document” is required by law, so that buyers aren’t left in the dark regarding the fees or royalties they will be paying, or they aren’t surprised when the franchisor requires them to meet certain obligations like minimum sales or remodeling.
- In terms of state or local licenses required to legally operate the business, like a liquor license, food license, contractor’s license, etc the buyer needs to ask the seller exactly which licenses they need, how much they cost, find out if they are transferrable from one owner to another, and if not, how to apply, and how long it takes to get the new license needed to operate lawfully. These will need to be in place at the time of closing.
- Buyers need to know if the business has any government contracts currently in place. Most times, those contracts are not transferrable in an asset sale, and a stock sale might be necessary. Government contracts will also often require certain licensing and specific levels of insurance, so it’s important to know the specifics.
- When requesting documentation during due diligence to verify the financials that the business is doing, most of the time Tax Returns are requested. If a buyer wants to be sure that these Tax Returns are indeed the same tax return that was actually filed with the IRS, they can request a “Tax Return Transcript.” This is something the seller can easily request via the IRS’s website, and then provide the buyer with.
- Buyers need to understand the situation with the employees. Find out how much sick leave, personal leave, vacation time, and unpaid benefits have been accrued by each employee. Any employee staying with the business after the sale will expect these numbers to remain the same, and the buyer, as the new owner will be responsible for all of this paid time off. So, it’s important to understand the full picture there.
- Ask to see any written employee contracts to verify that they transfer to a new owner of the business. The seller has hopefully made them assignable, and in a sales-driven business, such as an insurance company for example, non-compete agreements will be important to ensure that the employees stay with the business after the change in ownership.
- In business sales, one of the biggest areas for complication is the lease. If there is an existing lease, find out if it’s assignable or if the buyer will need to procure a new lease. Ask about any lease transfer fees. Find out what the relationship is like between the seller and the landlord to hopefully gauge how easy the lease process will be. Ask about the landlord’s requirements for either transferring a lease or granting a new lease. The more buyers know about what the landlord expects, the more prepared they can be.
- Ensure that specific intangible assets, such as websites, social media accounts, phone numbers, email addresses, etc are uniquely spelled out and individually listed on the equipment list/asset list that will be attached to the Asset Purchase Contract. That way there are no questions about which intangibles will be sold with the business. Also, just make sure to get a list of passwords from the seller or create a plan with the seller to transfer all of those intangibles at closing.
- Make sure to find out if there are any deposits or gift card/certificate sales. If so, buyer and seller need to agree on how those items will be split up, and either credited/debited at closing. Deposits for work not yet performed is often handled during “Work in Progress” right before closing, but it’s good to have the conversations early, so there are no surprises down the line. The seller might be expecting to keep everything, and the buyer will be responsible for delivering the goods or services. Negotiation of these items should be fair and a win-win for both parties.