The buyer wants to make sure he or she knows what they’re getting when they buy the business. No buyer wants surprises. The process of investigating the business is called due diligence. The documents and information the seller provides to the buyer under a confidentiality agreement is part of this process. But the buyer will want to look beyond these documents and information.
The buyer may search the recorder’s offices to see if the assets are encumbered by any liens such as UCC finance statements, mechanic’s liens, deeds of trust, etc. A title report will also show whether the property is owned free and clear or is subject to encumbrances. The buyer should search the court system records for any litigation and search other public records to make sure the company is in good standing. The buyer may get a Dun and Bradstreet report to find out the creditworthiness of the seller. Depending on the type of business, the buyer should search the records of other government agencies. The buyer will also want to ask for information on bank loans, money owed to suppliers, and potential claims. The buyer will ask the seller to represent the accuracy and completeness of these records along with other representations and warranties.
The seller will also want to check out the buyer, especially if the sale is owner financed. The seller can ask for financial statements, tax records, resumes, credit reports, references, court records, and some of the same records the buyer will review. The seller will also want representations and warranties from the buyer. If you’re the seller and are financing the transaction, then you want to make sure that you’re first in line as a creditor or if you’re second in line, that there will be enough left over for you.
The seller and buyer will need to respond to the results of the due diligence. This may mean adjusting the price, carving out liabilities, including indemnification language, etc. Whatever is done, the agreement is only as good as the financial soundness of the seller or buyer.