Buying a Business in California? Protect Yourself With These Steps

AdobeStock_204199356-300x169The prospect of buying an existing business in California can be an extraordinarily exciting time for all types of people, but there will be several concerns of which a prospective business owner needs to be aware. You do not want to leap into any business venture without performing due diligence when it comes to research and preparation.

Structure Law Group, LLP is a business law firm that has offices in both Silicon Valley and Los Angeles to help focus on all kinds of business transactions and litigation for clients throughout California. When you are considering buying any business in the Golden State, be sure you are working with an experienced Los Angeles business attorney.

Get Full and Complete Disclosure

When you are the buyer of a business, you should insist that any seller fully disclose all of their liabilities concerning the operation of the business. Make this insistence even when you do not intend to assume any of the seller’s liabilities.

A Purchase and Sale Agreement between you and the seller should also include representations and warranties by the seller regarding their contracts affecting the property, such as equipment leases, maintenance contracts, or similar agreements; all taxes relating to the operation of the property, including sales taxes, income taxes, payroll taxes, and property taxes; employee wages and other benefits; amounts owed to suppliers; and existing obligations to both present and past customers. Disclosure will be the first step toward obtaining a full and accurate picture of what a seller owes and what the buyer could become responsible for upon purchase.

You should also ask the current business owners what kinds of challenges they are facing and what they have done to try to solve the problems, as well as how the attempts turned out. Be sure to get the help of an attorney in Los Angeles when dealing with poorly conceptualized business plans; competitors that may be far ahead; existing business debts; location issues; branding issues; inventory difficulties such as the cost of production being too high, low quality losing business customers, storage being difficult, or lack of supply and demand balance; and lackluster equipment that may be outdated or too expensive to upgrade.

Investigate Both Employee Concerns and Potential Tax Liability

A seller should provide you with a list of all their employees, including each employee’s respective salary, job title, social security number, wages, bonuses, vacation, sick pay, and other benefits payable to employees at the time that a Purchase and Sale Agreement is signed and at the time of closing. Make sure the seller will remain responsible for all accrued wages, salaries, bonuses, and benefits relating to the period before closing.

You should also investigate whether the business has a union or collective bargaining agreement or if there were any past attempts or efforts to organize any of the employees into a union. You also do not want to assume any of the seller’s tax liabilities.

It can be difficult to determine what tax liabilities are, especially when a seller is paying taxes on an estimated basis or did not yet file an applicable tax return. Work with a merger and acquisition attorney in Los Angeles to obtain a seller’s representation and warranty that no lien exists and no lien will be asserted against the real estate you are purchasing due to their failure to file any tax return or report or pay any federal, state, or local taxes.

You will also want to demand that a Purchase and Sale Agreement contains a provision that obligates the seller to pay all taxes that relate to the seller`s prior ownership but may not have an assessment until after the closing.

Review Existing Contracts and Accounts Receivable and Payable

Many businesses will often enter into contracts for almost everything, but you should analyze every single contract to determine whether each one will be acceptable. If you find contracts to be acceptable and want to assume the contracts, then you will want to review the contracts to ensure assignment to you without a vendor’s approval.

When there is a requirement of a vendor’s prior approval for a valid assignment of a contract, the Purchase and Sale Agreement will have to obligate the seller to obtain that prior written approval prior to closing. When you do not want to assume a contract, you should determine whether the contract can be terminated early by the seller.

When a contract is for a specific term, and you cannot terminate it early, you will want to negotiate this point in the Purchase and Sale Agreement by possibly requiring the seller to either buy out the contract or agree to be responsible for the payments required by the contract. When a business seller is leasing equipment for their business but is months behind in payments at the time of closing, the Purchase and Sale Agreement could state that you will not be responsible for the seller’s liabilities arising before the date you acquire the business.

Even when you do not have any legal obligation to the equipment lessor after closing, you could still be left in a difficult position if you are unaware of any amounts owed on equipment leased by the seller before closing. You could receive calls from lessors after closing saying that they will confiscate equipment unless you pay the amounts owed by the seller.

Avoid this situation by thoroughly auditing the seller’s books and records before closing and forcing a seller to provide complete evidence that the seller will pay all obligations in full.

Call Us Today to Schedule a Consultation With a Los Angeles Business Attorney

If you are in the process of buying an existing business in California, take all of the steps necessary to protect yourself before closing any deal. Make sure you are working with a Los Angeles business attorney at Structure Law Group, LLP so you can be confident that all of your interests will have the strongest protection.

Our firm regularly assists clients in these types of business transactions and knows how to make sure that they will not face any exposure to costly issues down the road. You can call (408) 441-7500 in Silicon Valley or (310) 818-7500 in Los Angeles, or you can contact us online to schedule an initial consultation that will allow us to take a closer look at your case and advise you on the next steps you should be taking.