This document provides a checklist and summary regarding information and documents a person should consider when purchasing a business. The sale of a business can be a complicated transaction and the purchaser should exercise his or her due diligence. This checklist raises many of the issues that may arise during the sale of a business. It is important that a potential purchaser review this information to know what assets he or she is acquiring and what liabilities he or she is assuming. This document also sets forth some of the state and federal laws which may apply. This checklist should be reviewed by any potential purchaser of a business.
This document provides a checklist and summary regarding information and documents a person should consider when purchasing a business. The sale of a business can be a complicated transaction and the purchaser should exercise his or her due diligence. This checklist raises many of the issues that may arise during the sale of a business. It is important that a potential purchaser review this information to know what assets he or she is acquiring and what liabilities he or she is assuming. This document also sets forth some of the state and federal laws which may apply. This checklist should be reviewed by any potential purchaser of a business. Due Diligence Checklist when Purchasing a Business The sale of any ongoing business, even a sole proprietorship, can be a complicated transaction. The buyer and seller (and their attorneys) must consider the law of contracts, taxation, real estate, corporations, securities, and antitrust in many situations. Depending on the nature of the business sold, statutes and regulations concerning the issuance and transfer of permits, licenses, and/or franchises should be consulted. If a license or franchise is important to the business, the buyer generally would want to make the sales agreement contingent on such approval. Sometimes, the buyer will assume certain debts, liabilities, or obligations of the seller. In such a sale, it is vital that the buyer know exactly what debts he/she is assuming. In any sale of a business, the buyer and the seller should make sure that the sale complies with the Bulk Sales Law of the state whose laws govern the transaction. A bulk sale is a sale of goods by a business which engages in selling items out of inventory (as opposed to manufacturing or service industries). Article 6 of the Uniform Commercial Code, which has been adopted at least in part by all states, governs bulk sales. If the sale involves a business covered by Article 6 and the parties do not follow the statutory requirements, the sale can be void as against the seller's creditors, and the buyer may be personally liable to them. Sometimes, rather than follow all of the requirements of the bulk sales law, a seller will specifically agree to indemnify the buyer for any liabilities that result to the buyer for failure to comply with the bulk sales law. Of course the seller’s financial statements should be studied by the buyer and/or the buyers accountants. The balance sheet and other financial reports reflect the financial condition of the business. The seller should be required to represent that it has no material obligations or liabilities that were not reflected in the balance sheet and that it will not incur any obligations or liabilities in the period from the date of the balance sheet to the date of closing, except those incurred in the regular course of business. A sale of a business is considered for tax purposes to be a sale of the various assets involved. Therefore it is important that the contract allocate parts of the total payment among the items being sold. For example, the sale may require the transfer of the place of business, including the real property on which the building(s) of the business are located. The sale might involve the assignment of a lease, the transfer of good will, equipment, furniture, fixtures, merchandise, and inventory. The sale may also include the transfer of the business name, patents, trademarks, copyrights, licenses, permits, insurance policies, notes, accounts receivables, contracts, cash on hand and on deposit, and other tangible or intangible properties. It is best to include a broad transfer provision to insure that the entire business is being transferred to the buyer, with an itemization of at least the more important assets to be transferred. In making this allocation, the buyer's interests will often conflict with the seller's. The seller will ordinarily seek to maximize its capital gain and ordinary loss by allocating the price to items producing such a result. The buyer will normally seek to have the price allocated to depreciable assets and to inventory in order to maximize ordinary deductions after the business is acquired. Due Diligence Checklist 1. Business Information © Copyright 2011 Docstoc Inc. registered document proprietary, copy not 2 Reasons business is for sale Amount of business for sale (all or part) History of business Description of products and/or services Address of business Date and state of incorporation States in which the company is qualified to do business Minute books, bylaws, certificate of incorporation, and stock certificate book Shareholder agreements Any special restrictions on the sale Shareholders and their holdings Rights of each class of stock and other securities Capitalization Fiscal year Accountants- name, address for each Attorneys- name, address for each Location of company records Credit rating Bank depositories Bank references 2. Operations Description of business, including manufacturing, distribution, and marketing activities Manufacturing history and agreements Distribution history and agreements Marketing history and agreements Advertising history and agreements Public relations history and agreements Principal vendors and terms Government contracts Seasonal factors Branch offices and associated operations Subsidiaries, associated operations, and intercompany dealings Documentation on systems & processes 3. Sales Description of the market Relative size in the industry Major competitors Industry trends and recent developments © Copyright 2011 Docstoc Inc. registered document proprietary, copy not 3 Industry advantages and disadvantages Long-range industry prospects Client names and address Number of customers Principal customers Customer repeat business Pricing policies and fluctuations in the past three years Sales backlog Sales materials Sales personnel compensation Effectiveness of advertising and other sales promotion programs Gross and net sales for the past three years and for the last twelve months Sales comparison with the industry for the past three years and for the past twelve months 4. Personnel Organization chart Number of employees and their positions Employee contracts Independent contractor agreements Condition and accuracy of employee records Union contracts Morale and human resource issues Consultants - terms and payments Pension, profit-sharing, insurance, stock bonus, deferred compensation, and severance plans Accident history, worker's compensation costs Industry comparison as to wage rates and number of employees 5. Intellectual Property Status of patents Status of trademarks Status of copyrights Status of trade secrets Status of domain names Use of name issues Intellectual property ownership - company or individual Licensing agreements Infringement and other intellectual property litigation Protection policies United Sates/ international strategies Brand management strategies Research and development strategies 6. Business Facilities © Copyright 2011 Docstoc Inc. registered document proprietary, copy not 4 Location Status of leases Assignability of leases Land owned or leased - description, value, taxes, future plans Buildings owned or leased - description, value, taxes, future plans, depreciation Furniture, fixtures - description, value, condition, depreciation, useful life Insurance coverage Ownership of title All Uniform Commercial Code (UCC) filings 7. Computer Systems Network system - type, setup Computers networked - how many, description Computers- condition, value, depreciation- owned or leased Computer programs installed - owned or leased Vendor and service arrangements 8. Financial and Related Data Tax returns for the past three years Annual and quarterly statements, including balance sheets, income statements Earnings record, including gross and net profit margins Earnings record compared to the industry Break-even analysis Payroll - federal and state(s) Annual and quarterly payroll report Sales tax payments - proper filings Nonrecurring income and expenses Earnings forecast Pro forma balance sheet Chart of accounts Cash and working capital requirements Interest charges Annual depreciation and capital additions Inventory turnover and policies Market and book value analysis Accounts payable and receivable analysis Accounts receivables Notes payable and receivable analysis Bad debts - collectability and policies Analysis of investments or other assets Deferred expense analysis Analysis of short-term, long-term debenture and mortgage debt Existing and potential liens Status of leases Insurance coverage © Copyright 2011 Docstoc Inc. registered document proprietary, copy not 5 Contingent liabilities Status of any litigation Status of licenses or franchises Accounting procedures and practices Review of all legal counsel opinion letters related to the business 9. State and Federal Laws and Regulations Current federal, state, and local tax status Qualifications for doing business Certificate of good standing in all states Regulatory agency consents and issues Antitrust problems Blue-sky laws SEC filings and problems Stock exchange information, if any Environmental issues 10. Comparison Analysis/ Common Ratio Comparisons Earnings/book value Price/book value Price/earnings Price/fixed assets Sales/accounts receivable Sales/fixed assets 11. Structure of Sale Sale of corporate stock - unforeseen liabilities, taxation, corporate liquidation Sale of assets - purchase price, allocation, taxation, bulk sales laws, corporate liquidation Reorganization- mergers 12. Acquisition Issues Purchase price Purchase terms Financing Allocation of acquisition price Default issues and return of business considerations Brokerage fees Reasons for buying or selling © Copyright 2011 Docstoc Inc. registered document proprietary, copy not 6
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