Imagine you find the perfect business to buy. The owner is approaching retirement after a long and successful career. The company has a strong reputation in the market. Revenue appears healthy. Employees seem happy and experienced. After some promising conversations, you and the seller strike a deal and work toward closing. At this point, most buyers are excited about why the deal makes sense. After all, the buyer has spent time and effort to reach a deal.
Then the buyer hires an attorney. Despite popular belief, the attorney’s role is not to torpedo the deal. The attorney’s role is to help guide the buyer to closing with eyes wide open. Behind that process is a simple question: What exactly are you buying?
The Buyer Sees Revenue. The Attorney Asks Where It Comes From.
Most buyers look at a business and see easy revenue. An attorney looks at the same business and ask where that revenue comes from. Financial statements may show strong sales, but that might not be the whole story. Is the business dependent on one or two huge customers? Will those customer stay after the seller leaves? Are the revenue sources steady, or is the business constantly rebuilding its customer base? What does cashflow look like? Revenue is important part of the deal package, so the why and how of the revenue is essential.
The Buyer Sees Relationships. The Attorney Asks for Contracts.
A buyer may see the seller’s years of successful customer and vendor relationships and assume those relationships will continue after closing. An attorney wants to see if the contracts support that story. Sometimes those contracts contain assignment restrictions, change-of-control provisions, termination rights, or exclusivity obligations that become important once ownership changes. Sometimes there is no contract at all. In any event, long-standing relationships are valuable, but only if they remain long-standing after closing.
The Buyer Sees a Team. The Attorney Asks Who Makes the Business Run.
Buyers often focus on whether a business has enough employees. Attorneys focus on which employees matter most, whether they will stay, and how to be confident on both points. In many businesses, a handful of people hold the knowledge and relationships to keep everything moving. Understanding those team members’ roles in the deal provide the buyer valuable insight.
The Buyer Sees a Brand. The Attorney Asks Who Owns It.
When a buyer sees a well-known brand, a polished online presence, and proprietary information, the buyer might assume the seller owns it all. The attorney knows that is not always true. If ownership rights did not properly flow to the seller, the answer to “who owns this?” may be unclear. A company cannot sell intellectual property that it does not own. People can be hired to develop that IP, and as outlined in a previous post, just because you hired someone does not mean you own the IP they create.
The Buyer Sees a Functioning Business. The Attorney Asks Why It Functions.
The buyer sees a business running smoothly. The attorney asks what legal and compliance structure makes that possible. The buyer sees a willing seller. The attorney asks whether the seller has the corporate records to show they own what they say they own and they can sell it to the buyer without an issue. These questions are rarely the most exciting ones, but the answers speak volumes for the value of the deal.
Due Diligence, Not Doom.
Buyers sometimes view due diligence as a hunt for why to walk away from a deal. In reality, due diligence lives up to its name: giving a deal the due diligence to match its importance. Some issues can be fixed before closing (especially if found early). Others require a lower purchase price or shifted risk to hedge against uncertainty. Whatever the solution, due diligence helps the buyer better understand what they are buying. It replaces assumptions with facts.
Closing with Your Eyes Wide Open.
No business is risk-free. The goal of due diligence is not to find a perfect company (they don’t exist). The goal is to understand the risks of the business before they become yours. A buyer at closing with a rich understanding of the business, its opportunities, and its challenges is in a far better spot than the buyer who discovers them after closing. When in doubt, involve your attorney to help you find and navigate those risks.
Thanks for reading!