Due diligence is probably the single most important step one can take before purchasing a business. Legal due diligence, in particular, is designed to expose possible risks and liabilities inherent to the purchase. With experienced counsel by your side, you can have confidence that the process will go smoothly. Before buying a Connecticut company, know what it is worth. Let Aeton Law Partners’ business attorneys assist with your legal due diligence.
Understanding legal due diligence
There are two broad categories of due diligence: legal and financial. Both are aimed at revealing the true worth of a company but in different ways. Financial due diligence concerns the financial success, profitability, and viability of a business. Meanwhile, legal due diligence uncovers liabilities, debts, obligations, liens, and other risks. It exposes potential litigation and legal issues you could face as the new owner.
Here are some of the major items to review for legal due diligence purposes:
Step 1: Corporate or LLC documents
Take a close look at the organizing and governing documents of the company you wish to purchase. You will want to know whether:
- The company has been properly organized in Connecticut
- The company is in good standing and has not been dissolved
- Necessary operating fees have been paid
A Certificate of Legal Existence, obtainable from the state, is a good place to start. You should also get copies of these documents:
For corporations
- Certificate of Incorporation
- By-laws
- Minutes of shareholder and director meetings
- Shareholder agreements
- Option agreements
For LLCs
- Articles of organization
- Operating Agreement
- Minutes of membership meetings
- Manager agreement
- Outstanding purchase rights agreements and option agreements
Another reason to review these documents is so you know the official name of the business. Companies often have affiliates and DBAs, but you may not be interested in buying those. You may want to purchase the parent company instead.
Step 2: Contracts, agreements, and policies
Any major agreements the company has entered into should be examined. This is so you understand the various legal and financial obligations the company has. After all, it will be your job to fulfill those obligations once the company is yours. To that end, you will want to examine:
- Contracts with distributors, suppliers, contractors, customers, and others
- Equipment leases
- Non-compete and confidentiality agreements
- Intellectual property licensing agreements
- Real estate purchase agreements and other documents pertaining to real property
- Insurance policies
Step 3: Permits and licenses
Can the business you intend to purchase legally operate in Connecticut? Get copies of any licenses and permits that may be required by federal, state, or local authorities. Also check with an attorney to find out which licenses and permits the business needs to have. For instance, if you want to buy a bar, does it have an active liquor license?
Step 4: Assets and liabilities
This stage of due diligence has some overlap with financial due diligence. What assets does the company own? What liabilities does it have? Assets include cash, securities, equipment, inventory, intellectual property rights, accounts receivable, and more. Liabilities include court judgments, pending lawsuits, unpaid taxes, employee benefits, debts, and others. Knowing these will help you know what belongs to the company and what is owed by it.
Step 5: Liens
Ask a Connecticut business lawyer to assist with this step. Does the business have any liens against it? These could include everything from tax liens to UCC (Uniform Commercial Code) liens. If there are liens, then you may need to convince the current owner to take care of them before you buy.
Step 6: Customer complaints
What sort of reputation does the company have? Customer complaints are easy to find online. There are sites like Yelp which have informal complaint processes. Then there are sites like the Better Business Bureau with more structured complaint resolution procedures.
Reach Out To A Connecticut Business Law Attorney
Legal due diligence can be tough, but a skilled Connecticut business lawyer is ready to walk you through it. Let our firm help you ascertain the true value of the business you want to buy. Call Aeton Law Partners today.