The buyer wants to make sure he or she knows what they’re get­ting when they buy the busi­ness. No buyer wants sur­prises. The process of inves­ti­gat­ing the busi­ness is called due dili­gence. The doc­u­ments and infor­ma­tion the seller pro­vides to the buyer under a con­fi­den­tial­ity agree­ment is part of this process. But the buyer will want to look beyond these doc­u­ments and information.

The buyer may search the recorder’s offices to see if the assets are encum­bered by any liens such as UCC finance state­ments, mechanic’s liens, deeds of trust, etc. A title report will also show whether the prop­erty is owned free and clear or is sub­ject to encum­brances. The buyer should search the court sys­tem records for any lit­i­ga­tion and search other pub­lic records to make sure the com­pany is in good stand­ing. The buyer may get a Dun and Brad­street report to find out the cred­it­wor­thi­ness of the seller. Depend­ing on the type of busi­ness, the buyer should search the records of other gov­ern­ment agen­cies. The buyer will also want to ask for infor­ma­tion on bank loans, money owed to sup­pli­ers, and poten­tial claims. The buyer will ask the seller to rep­re­sent the accu­racy and com­plete­ness of these records along with other rep­re­sen­ta­tions and warranties.

The seller will also want to check out the buyer, espe­cially if the sale is owner financed. The seller can ask for finan­cial state­ments, tax records, resumes, credit reports, ref­er­ences, court records, and some of the same records the buyer will review. The seller will also want rep­re­sen­ta­tions and war­ranties from the buyer. If you’re the seller and are financ­ing the trans­ac­tion, then you want to make sure that you’re first in line as a cred­i­tor or if you’re sec­ond in line, that there will be enough left over for you.

The seller and buyer will need to respond to the results of the due dili­gence. This may mean adjust­ing the price, carv­ing out lia­bil­i­ties, includ­ing indem­ni­fi­ca­tion lan­guage, etc. What­ever is done, the agree­ment is only as good as the finan­cial sound­ness of the seller or buyer.