Employee Due Diligence

The next part of our series on Due Diligence will discuss Employee Due Diligence.

Now if the business you are looking to buy does not have any employees then this may be a simple process, but it may not be as simple as you would think. For example, the business that you are looking to buy may not have any employees per se, but they may instead utilize independent contractors, which may in fact be more properly classified as employees. This could bring up some significant liability and operational concerns going forward, so you will want to have these relationships carefully scrutinized by yourself and a knowledgeable attorney. This way you will know what you are getting into with this business purchase.

Some of the documents you should be looking for are:

  • Employment contracts
  • Independent contractor agreements
  • Non-Disclosure, Confidentiality, Intellectual Property and Non-Compete agreements
  • Any employment or Human Resources policies or handbooks
  • Documents showing any employee benefit plans such as (health insurance, retirement, bonuses, etc.)

All of these documents can bring up a variety of issues. You need to think about whether or not you want to continue using the same contractors and employees going forward. It may be a good idea for business continuity and transition, but it may also be a good time to make a change as well, especially if you have significant changes in mind or want to bring in key new staff of your own. The enforceability and terms of these agreements can have a substantial impact on the value and continuation of the business, and you need to be sure that you are getting a fair deal with the purchase.

Beyond the documents themselves, it may be a good idea to gauge employee feelings regarding an acquisition and possible change in management. If employees are not happy about such a large change, it could be a disaster in the making to take buy the business. Think carefully and don’t let the excitement of being an entrepreneur cloud your judgment. Trust experienced professional advisors to help you with deals of this significance.

If you need assistance with legal help and/or document drafting for your business sale, please contact the Law Office of E.C. Lewis, P.C., home of your Denver Business Attorney, Elizabeth Lewis, at 720-258-6647 or email her at elizabeth.lewis@eclewis.com.

Legal Due Diligence

Continuing as part of our series on Due Diligence, we have already outlined Financial Due Diligence, and this time we will take a look at due diligence regarding issues that are more legal in nature.

As part of the due diligence process, it is important that you have the legal documents of the business reviewed, just like you would the business’ financial statements. This can help identify irregularities or potential problems with the acquisition. In addition to documents to review, it may also be a good idea to interview the owners and employees of the company to see if what happens in practice with the business lines up with its legal documentation.

Some of the documents to review include:

  • Articles of Incorporation/Organization, Bylaws/Operating Agreement, or any other equivalent document (like a Partnership Agreement)
  • Minutes of meetings as well as any stock or other buy-sell agreements between owners regarding their ownership interests
  • Documents showing capitalization of the company (meaning who are the stock or ownership interest holders)
  • Major contracts the company has with its suppliers, distributors, etc.
    • This can also include employment contracts
  • Insurance policies benefiting the company
  • Any intellectual property rights, licenses, trade secret information etc.
  • Documents relating to any lawsuits against the company

These documents will indicate how the company has been formed, as well as who all of the owners are, what types of restrictions have been placed on the company or its owners, and other key legal issues. This can help determine if there will be any complications regarding the transaction, as well as if the business has been run properly and in accordance with the legal documents. Additionally, having this type of documentation reviewed can help understand the business better, which can also help in determining a good valuation of the company. Finally, having these legal documents reviewed can also provide insight into existing or potential liabilities the business is exposed to, so you can understand what you are getting yourself into by purchasing the business.

If you need assistance with legal help and/or document drafting for your business sale, please contact the Law Office of E.C. Lewis, P.C., home of your Denver Business Attorney, Elizabeth Lewis, at 720-258-6647 or email her at elizabeth.lewis@eclewis.com.

Financial Due Diligence

Whenever you are thinking about buying a business (or selling a business) it is expected that you will perform your due diligence before the sale is final to help decide whether or not the purchase is a good idea by verifying the material facts related to the transaction. This post discussing financial due diligence will be the first in a series discussing the different aspects of due diligence that should be performed prior to finalizing a transaction.

The idea behind financial due diligence is to help determine the value of the company you are buying by reviewing their financial documents. These financial documents should be audited independently to determine their accuracy.

  • Financial statements for the past few years
  • Income statements for the past few years
  • Tax returns for the past few years
  • Balance Sheets for the past few years
  • Description and valuation of significant assets (including real estate and accompanying title and tax information, as well as information of depreciation schedule)
  • Any current budgets, revenue projections, or other similar documents
  • Any loan or other promissory note documentation (as well as any security interests against the business or its assets)

You want to be sure that nothing in these documents is questionable or raises any concerns about the current and future value of the company or assets that you are purchasing. You want to be sure that you have all the right information so that you can negotiate in a fair and informed way. If the other party is unable to produce these documents, that may raise a red flag as well, and you will want to be sure that you raise these issues with your professional advisors (attorney, accountant, etc.) to determine what the next course of action should be.

Big purchases can be very emotional, whether it is buying a home or a car, it can be easy to get emotionally attached to the prospective purchase. However, you don’t want to let yourself get so caught up in the emotional excitement of taking over a business that you lose site that this is a business transaction. You need to independently verify that everything is what the current owners say it is with regard to the business you are thinking about buying.

If you need assistance with legal help and/or document drafting for your business sale, please contact the Law Office of E.C. Lewis, P.C., home of your Denver Business Attorney, Elizabeth Lewis, at 720-258-6647 or email her at elizabeth.lewis@eclewis.com.