Buying a business can be an exciting and stressful time. Yet, the excitement and anticipation of owning a business can result in hastily overlooking some necessary details that may put you at significant financial risk and hamper your ability to run the business successfully. You need to be prepared to complete a thorough due diligence period and make sure that the seller has taken care of all taxes, liens, or any potential other encumbrances. Additionally, there are many aspects of the existing business that you will need to verify, and you cannot always count on getting complete and accurate information from the seller.
Perform the Necessary Due Diligence
Any investor or potential business owner will want to verify the financial details and performance of a company in which they are looking to invest. The due diligence period is the time when you will be able to complete this investigation. This does not mean simply reviewing the documents provided by the seller. Often, you will discover that there are undisclosed issues or reasons for the seller wanting to sell the business.
You will also need to confirm the current status of partnerships and make sure the contracts are up to date and in good standing. It is also important to reach out to current customers or clients to get their overall impressions of the business and/or services. Are they getting what they expect? Are they happy with the service? Do they plan to continue their current relationship with the business? You can even use this as an opportunity to find ways that you will be able to improve the business and offer them additional products or services.
This is also the time to investigate the competition. You need to find out how the business compares to new and existing competitors. A business owner might want to sell because a new competing business or product has emerged that will pose potential future challenges and problems. This can give you a good idea if you can expect revenue and sales to stay consistent. You may still want to purchase the business, but will need to factor the cost of improvements and innovations into the purchase price if new competition has arrived.
Letter of Good Standing in Arizona
A letter of good standing in Arizona, also referred to as a tax clearance letter, provides you evidence that the business is in compliance with all tax filings and payments. The Arizona Corporation Commission allows you to complete a Records Request Form on their website to apply for a letter of good standing. There is a cost of $45 to file online. You can request a letter of good standing by mail for $10. It may appear to be obvious that this is an essential step, but many new business owners who fail to take such action find out about unknown and undisclosed existing tax issues after they have completed the purchase.
Check UCC Liens
One of the final steps of due diligence is making sure that the business does not have any other liens or undisclosed debts. You will need to verify that the business is in good standing with all creditors and get a clear understanding of all secured debt that is associated with the business. A good place to start is with a basic search for UCC liens on the Arizona Secretary of State’s website. This will give you an overview of the creditor finance statements on record. In order to get a complete record, the Arizona Secretary of State’s office requires you to submit a Form UCC-11 and pay a fee which varies depending on the search requested.
Should You Use a Business Broker?
One of the most frequently asked questions by people interested in purchasing an existing business is whether they should use a business broker. Like many things, there are pros and cons to using a business broker. They can certainly introduce you to businesses for sale that you would not have otherwise found. They can also provide guidance over the process. However, you need to keep in mind they are often representing the seller of those businesses and might not be acting in your best interest.
Business brokers typically charge a high commission for the transaction and they only get paid when the deal closes. This typically means they do not have any incentive to work with attorneys and accountants. They will typically suggest using their purchase documents and might even suggest this can save you money because you won’t need an attorney. This can be costly advice. An experienced attorney can provide you with purchase documents that focus on protecting your investment and interest. You will also want an experienced attorney and accountant to guide you through every step of the due diligence process. This should not be left to chance, and business brokers do not have any incentive to help you find undisclosed issues with the business.
At MacQueen & Gottlieb, we have significant experience with the purchase and sale of businesses in Arizona. Our attorneys can make sure you complete a thorough due diligence investigation and provide you with purchase documents structured with your interest in mind. If you are considering purchasing a new business, contact us today at 602-533-2840 to schedule an initial consultation or make an appointment online.