Due Diligence | Part 7 | Miscellaneous Issues
We’ve finally arrived at the last post in our due diligence section of our series on the purchase and sale of a business. In today’s post we explore some of the miscellaneous issues you should be aware of during due diligence.
Real Property Issues
We’ve mentioned in previous posts that you should review all “material” contracts, which would include all leases, deeds, or other real property-related contracts. However, there are other, lesser known, real property issues that are often overlooked during due diligence. One of these “other” issues is easements and other restrictions on your ability to use the real property as you’d like.
An easement is a right of use over the property of another. For example, you may be purchasing a retail store near a beach. Attached to the property may be an easement that allows pedestrians to walk across your property to access the beach. Depending on the terms of the easement, you may not be able to restrict that access, which may impair your ability to change the use or complete construction on the property.
Another overlooked issue involves environmental matters. Do a quick Google search and you’ll hear horror stories about individuals who have purchased a company or property only to find out that there are serious environmental issues that must be resolved before conducting business on the property. Most remedies associated with resolving environmental issues are expensive. Hiring an environmental engineering company to complete an environmental assessment on the property is also expensive, but it is far less expensive than having to wait for the same assessment (and remediation) with your business shuttered after you have purchased the business.
Are you required to purchase insurance to operate the business? What types of policies should you purchase? Will your lender require you to purchase certain insurance? Will the state(s) you do business in require certain insurance? How much will it cost to insure the business and its’ activities? It’s important that you are aware of the various operating costs, including obtaining an insurance policy (or policies, depending on the business), involved in maintaining the business you are purchasing.
Press Releases and Marketing Materials
You should carefully review press releases and marketing materials that the target company uses or has used in order to ensure they are consistent with information you have received from the seller, and to make sure there aren’t any red flags or negative publicity that you should be aware of. The last thing you want is to have to put out a public relations fire (that you were unaware of) after purchasing the business. Further, when you purchase a business, you are purchasing the branding, the reputation, and the goodwill. You will want to educate yourself on the current branding and reputation of the company, and press releases and marketing materials are a good place to start.
Have any reports been filed with government agencies?
From the SEC to the IRS to the FTC, there are numerous government agencies that regulate the day to day operations of companies in the US. It’s important that you review the company documents for any reports that have been filed with government agencies, or notices that have been provided to the target company from any government agencies. An unexpected call from the IRS or SEC after you’ve purchased the business will make for a rough day.
We did not cover every possible issue you should be aware of during due diligence, but we’ve highlighted some of the most important issues you should be aware of. Each business acquisition is unique. To make sure you’re reviewing the “right” documents and protecting your rights, you should consider contacting a business attorney to assist you with the due diligence process.
If you’d like to learn more about due diligence or the preliminary steps to purchasing a business, please feel free to contact us today to schedule your free initial consultation.
Stay tuned, we’ll continue this series by discussing the structure of the transaction next!