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Before Taking The Wheel, Take A Hard Look

When it comes owning a business, some people like starting from scratch. Others prefer to have a foundation already established when they take the reins. There are pros and cons to both, but one should never think that by purchasing an existing business that they are minimizing their legal or financial risks. Just like starting your own, the first step to buying a business is determining what the best industry is for you, where you would like to be located, etc. - the generalities that only you can determine. The second phase, known as the "due diligence" phase, is a more fact-intensive process and may require more than one set of eyes. It is during this time when you review and verify information about the subject business. An attorney and accountant can offer invaluable assistance in this process. There are numerous things to consider, not all of which can be discussed at length herein, but this list should serve as a starting point for some of the most important considerations.

Legal Position of the Company

· Is the company subject to any pending or threatened law suits?

· Are there any contracts or negotiations currently taking place?

· What do the lease and purchase agreements provide? Subcontractor agreements? Sales agreements? Employment agreements? In other words, what terms will you be responsible for upholding?

· Is the business operating with the proper permits? Is it in compliance with OSHA or other law?

Financial Position of the Company

· What is the cash flow condition?

· Is the business carrying too much debt? What are all existing financial liabilities (employee benefit claims, liens by creditors against assets, etc.)?

· What do the financial statements and tax returns for the past five years say about the company?

Essential Company Documents

· Articles of incorporation, operating agreement, employee information, permits and licenses, tax identification numbers, insurance - all of these documents should be scrutinized and reviewed with the help of a professional.

The Tangibles

· What is the current inventory of the business? Is it in good shape?

· What is the condition of the building, equipment, and fixtures? What is their present value? Will modifications or improvements be necessary?

· What are the advertising and marketing costs of the business?

· What is the industry and market history? Will this business still be relevant in a few years? Is it "up and coming"? Is it floundering and in dire need of a makeover?

The Intangibles

· Are the employees happy? What do customers think of the business? What are the relationships with suppliers, subcontractors, etc.?

· What is the reputation of the business? This can either be an asset or a liability to take into account.

Buying an existing business in its entirety can be a good decision, but it can also be disastrous. The key is knowing what you are getting yourself into, understanding what the records and inquiries show, and seeking expert advice if necessary. If you are considering taking the wheel of an existing business, contact the corporate attorneys at McBrayer - we can be helpful co-pilots in the time of transition.

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Thomas D. Flanigan is a member of McBrayer, McGinnis, Leslie & Kirkland, PLLC in the Lexington, KY office. Mr. Flanigan specializes in the areas of entrepreneurial business, lending and commercial services and mergers and acquisitions. He can be reached at tflanigan@mmlk.com or 859-231-8780.

This article does not constitute legal advice.

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