INVESTIGATION OF THE BUSINESS YOU WANT TO PURCHASE
If you have identified a particular company whose business or stock or membership interests) you are interested in buying (the “Target Company”) here are some issues you want to consider at the very outset or soon thereafter.
Forming the “Acquisition Team” of Professionals
Business Intermediary
If you do not have significant experience purchasing existing businesses, negotiations and closings of a purchase, you should seriously consider engaging the services of a well qualified business intermediary (a business broker or an investment banker) to assist you even if you have identified the Target Company.
Accountant Make sure your accountant is both business and tax-savvy and experienced in the purchasing and sale of businesses. In some instances, you will want an accountant who has prior understanding of the business in which the Target Company engages.
Attorney No matter what the size of the deal, make sure that your lawyer is experienced in the purchasing and sales of businesses and very practical.. Your lawyer must be able to craft his or her approach to the transaction to fit the size of the proposed deal, your reasons for buying and the Target Company’s culture and the degree of sophistication of its decision makers. You don’t want your lawyer producing an unduly long and complex Asset Purchase or Stock Purchase Agreement or Limited Liability Company Membership Purchase Agreement which not only contains unnecessary provisions, thus to cause much time and effort to prune it back, but also turns off the decision makers.
If the Target Company has a patent, trade name, trademark or copyright which is important to the business, early on you must engage an attorney specializing in intellectual property.
If you plan to retain the Target Company’s work force, with or without operating the business in place, you may want to engage an attorney specializing in employment law or a non-lawyer human relations specialist.
Environmental Engineer If you plan to operate the Target Company “in place” you should engage the services of a well qualified and expeditious environmental engineering firm to investigate the environmental condition of the property occupied by the Target Company.
Insurance Advisor At some point in the progress of the deal, you will want to have a well qualified insurance professional evaluate (a) the Target Company’s; and (b) scope of coverage of its public liability, casualty, product liability, workers’ compensation, and employment practices insurance and the coverage amounts.
Form of Target Company’s Financial Statements
If the Target Company’s compilation or review financial statementsraise important questions either by their contents or omissions, you will have to determine what level of investigation you and your accountant are going to have to conduct to obtain a true understanding of the condition of the Target Company.
Human Resources and Employment Practices
Lawsuits and EEOC complaints as to sexual harassment, discrimination in hiring or terminating, wrongful termination of at-will employees without following the procedures in the company’s employment manual, elimination of job positions previously occupied by a mother wishing to return from maternity leave, refusal of the company to offer other duties to a partially disabled worker occur more and more every day. Failure to handle the above and other HR problems with maximum touch can turn a small fire into a major conflagration, with high legal costs, even if the Company settles for little money of consequence or defeats the claim, and the suits can expose the business to huge compensatory and punitive damage awards.
In a proposed purchase of a company’s capital stock or the membership interests in a limited liability company, or in a merger, too much uncertainty about contingent liabilities in the employment practices area can result in there being no deal. Even in an asset sale, where the buyer is acquiring a work force to continue to operate in place, too many poor past employment practices which will require the immediate attention of the buyer can get in the way of a deal.
Agreements by Target Company with Employees as to Confidentiality, Post-Employment Non-Competition and Inventions and Improvements
Depending on the nature of the Target Company’s business, you may have to investigate very early in the negotiations whether the Target Company has or has not appropriate written agreements with sales, technical or other employees as to Confidential Information, non-competition after cessation of employment, and assignment of inventions and improvements.
Provisions in the Target Company’s Lease
The obtaining of third party consents in order to close a sale of a business can cost time and money and sometimes kill a deal. This is especially true in case of an asset sale which involves transfer of the seller’s real estate of equipment leases. If you plan to operate the Target Company in place and it leases its facility from a third party, you should immediately obtain get a copy of the lease.. You will especially want to pay attention to the lease provisions as to the remaining term and renewal options, the use clause, the right of assignment, the landlord’s lien on the tenant’s property for unpaid rent and the respective rights and obligations with respect to repair and maintenance.
Environmental Investigation of the Company’s Facility
When the facility used by the Target Company is an environmental unknown by the time of the Asset Purchase or Stock or LLC Membership Sale Agreement, the negotiations regarding environmental contingencies and responsibility for clean-up costs, indemnifications and escrows are sometimes so difficult that deals die because of them. Sometimes a buyer does not have time to delay the closing until all the environmental questions are answered and problems are remediated
Accordingly, whether the Target Company owns or leases its facility, and whether or not New Jersey’s Industrial Site Recovery Act would apply, very early in the process you should require the Target Company to disclose all the information it has concerning the environmental history of the property. Furthermore, the acquisition agreement should provide for a due diligence period for you to investigate the building and other improvement and to have a Phase One environmental assessment made.
Important Agreements with Third Parties
If the business of the Target Company depends on any key agreements with third parties (e.g. distributorship agreements, sales representation agreements, franchise agreements, agreements with vendors or customers, employment agreements) require detailed disclosure of these agreements at the outset of negotiations.