Six Legal Questions to Ask When Buying a Business

You’ve been presented with the opportunity to purchase an ongoing business or franchise. You have hired counsel, gone through everything with your accountant and insurance broker, and are ready to sign on the dotted line.

What are you missing? There is no way to know for sure, but there are some aspects of such a transaction that are not necessarily intuitive. The following are six examples of the potential legal complications you may not readily think about when buying a business or franchise.  

 1. Is the person who appears to be the owner the only one who has an ownership interest in the business?

A business may appear to be owned by the person actually marketing it for sale, but may likewise be subject to the rights of others in rather obscure ways. This may arise in a variety of contexts. Setting aside an outright partnership or mutual shareholder arrangement, it may also come into play in a situation involving the existence of a divorce proceeding, a family trust for minors who inherited shares or a guardianship for an owner who is in failing health. There is usually good reason to ask whether the person selling the business is the only owner, and if not, whether others need to sign off on the contemplated transaction.

 2. Are any of the assets or the ownership interest being sold subject to the jurisdiction of a bankruptcy court?

It is highly likely that the buyer would know if the seller had already filed a bankruptcy petition; the obvious clue would be that the sale of the business or its assets would presumably not go forward without an order of the bankruptcy court. However, what if instead, one of the key vendors that the business relies on has just filed bankruptcy? What if the landlord of the commercial space where the office is situated has done so? These are key questions that the buyer’s due diligence team may wish to ask in the course of their investigation.

 3. Are the information technology contracts that are the backbone of the business legally assignable?

It is virtually impossible to run a sophisticated business these days without an equally robust information technology infrastructure. However, the terms and conditions of the contracts that govern it may not allow for a unilateral assignment to a purchaser. There may be a host of conditions that need to be met to ensure not only that the contractual rights and responsibilities are properly assigned, but also that there are no residual rights that the seller will continue to have.

 4. Are there any tax liens encumbering the business assets?

Tax returns are confidential documents that are generally not subject to complete disclosure in the course of the due diligence period of a business sale. However, while the business’ tax documents —for example, the K-1 state corporate business tax filing—may be subject to review during the due diligence period, the buyer also needs to have a search done of the tax liens to which the assets of the business may be subject. That is why it is important for the buyer’s accountant to work with their attorney to have the appropriate searches conducted and analyze the results.

5.  Are market forces trending downward, such that the business’ value may erode post-closing?

When a buyer is purchasing a business that sells a product or service with which the buyer may not be familiar, it is critical that they perform an evaluation of whether external market forces will undermine the future value of the business. Indeed, that may well be the unstated reason the business is being sold in the first place. In the 1980s and 1990s, companies that were selling microfiche technology or the food additive saccharine unknowingly did not have strong future prospects. The key is not to know that sort of thing retroactively, but instead to scope out what may be on the horizon. (Easier said than done.)

 6. Are there non-legal needs that the legal team can fullfill?

Your attorneys can bring much to the pre-closing period besides just performing the actual legal work. For example, they can retain a forensic accounting firm to review the underlying financial records, obtain an outside firm to search the judgment and financing statement lien index, find a commercial lender to fund the purchase and so forth. A law firm can be helpful in coordinating such outside vendors in ways that exceed the basic legal requirements of the transaction.

The Nissenbaum Law Group can Provide Legal Counsel for Persons Buying or Selling a Business

The Nissenbaum Law Group has a deep bench of attorneys that handle sale of business transactions. Whether the matter involves a major company, a new franchise, a company owned by a group of family members or is just a single person start-up, the firm welcomes the opportunity to provide whatever is needed to help its clients reach the finish line. Please see our Purchasing a Business practice page or contact us.