Thinking of Buying a Business? Here’s What You Need to Know

Buying an existing business can be an excellent way to jumpstart your entrepreneurial journey. Instead of building a business from scratch, you get an established customer base, brand recognition, trained employees, and (ideally) a profitable operation. However, before making a purchase, it’s critical to conduct thorough due diligence and understand the legal aspects of the transaction.

Failing to address legal risks could leave you with hidden liabilities, unexpected financial burdens, or even legal disputes down the road. To ensure a smooth and secure transaction, follow this comprehensive legal checklist when buying a business.

1. Conduct Thorough Due Diligence

Due diligence is the process of investigating a business before purchasing it. You need to verify the business’s financial and legal health to ensure there are no hidden liabilities. Key areas to review include:

• Financial Records: Request at least the last three years of financial statements, tax returns, profit and loss statements, and balance sheets. Look for inconsistencies, outstanding debts, and any signs of financial mismanagement. If the business is not profitable, you need to understand why.
• Contracts & Agreements: Obtain copies of supplier contracts, vendor agreements, customer contracts, lease agreements, franchise agreements, and partnership agreements. Ensure that key relationships will transfer smoothly to you and that there are no unfavorable terms that could affect the business’s operations.
• Litigation & Legal Issues: Research any pending lawsuits, regulatory violations, or past legal disputes. You don’t want to inherit legal troubles that could jeopardize your investment.
• Outstanding Liabilities: Check for unpaid taxes, debts, loans, liens, or pending claims against the business. Even if you’re purchasing the assets (rather than the entire entity), some liabilities may carry over if not handled correctly.

A business attorney and financial professional can help you navigate this process and uncover any red flags before you finalize the deal.

2. Structure the Purchase: Asset Sale vs. Stock Sale

When buying a business, you typically have two options:

• Asset Sale: You purchase only the specific assets of the business (e.g., inventory, equipment, intellectual property, customer lists) and do not assume its debts or liabilities. This is the preferred structure for buyers because it reduces the risk of inheriting the seller’s legal and financial problems.
• Stock Sale (or Membership Interest Sale for LLCs): You buy the entire business entity, including all assets, liabilities, and obligations. This method is more common when acquiring a corporation or LLC but comes with higher risks.

The best structure depends on your risk tolerance, tax implications, and long-term goals. Consulting with an attorney and CPA can help you make the right choice.

3. Verify Licenses and Permits

A business cannot operate legally without the proper licenses and permits. Before purchasing, verify that the business has:

• State and Local Business Licenses – Ensure all required registrations and permits are up to date.
• Professional Licenses – If the business operates in a regulated industry (e.g., healthcare, legal, finance, construction), confirm that all required certifications are valid and transferable.
• Zoning & Land Use Permits – Make sure the business location complies with local zoning laws. A retail store operating in a non-commercially zoned area, for example, could face fines or even closure.

Failing to confirm compliance with licensing and zoning laws could result in costly penalties or force you to reapply for permits under your ownership.

4. Review Employee & Independent Contractor Agreements

If the business has employees, you must review:

• Employee Contracts & Handbooks – Understand employee rights, benefits, wages, and workplace policies. If there are employment agreements, verify whether they will transfer to the new owner or need renegotiation.
• Non-Compete & Confidentiality Agreements – Some key employees may have non-compete clauses that prevent them from working for competitors after leaving.      Others may have confidentiality agreements protecting business secrets. Ensure these agreements are valid and enforceable under state law.
• Worker Classification Compliance – Check if workers are properly classified as employees or independent contractors under federal and state labor laws. Misclassification can result in fines and back taxes owed to the IRS and state agencies.

If you plan to retain employees, you may need to create new employment agreements that reflect your policies as the new owner.

5. Intellectual Property & Brand Protection

A business’s brand, trademarks, and intellectual property (IP) can be some of its most valuable assets. Before finalizing the purchase, verify:

• Ownership of Trademarks & Copyrights – Does the business have a registered      trademark for its name, logo, or products? Ensure you will legally own these assets after the sale.
• Patents or Proprietary Processes – If the business has patented products,      proprietary software, or trade secrets, ensure the seller transfers ownership properly.
• Domain Names & Social Media Accounts – The seller should transfer all website      domains, social media accounts, and digital assets to you as part of the purchase.

Failure to secure intellectual property rights could result in costly legal disputes down the road.

6. Secure a Solid Purchase Agreement

A well-drafted purchase agreement is essential to protect both parties. Key elements to include:

• Purchase Price & Payment Terms – Outline the total price, installment payments (if applicable), and conditions for finalizing the deal.
• Assets & Liabilities Being Transferred – Specify exactly which assets are included and confirm whether any debts or liabilities remain with the seller.
• Non-Compete Clause – Prevents the seller from starting a competing business nearby within a defined timeframe.
• Seller Representations & Warranties – Legally binding statements ensuring      that the seller is disclosing all financial, legal, and operational details truthfully.
• Closing Conditions & Contingencies – Define any pre-closing requirements, such as securing financing, obtaining lease approvals, or regulatory approvals.

Having an attorney draft or review the purchase agreement can help prevent costly misunderstandings.

7. Address Lease & Real Estate Considerations

If the business operates from a rented commercial space, you need to:

• Review the commercial lease agreement to confirm whether it can be transferred to you.
• Negotiate new terms with the landlord if necessary.
• Check zoning laws to ensure the location remains legally viable for the business’s activities.

If the sale includes real estate, conduct a title search, property inspection, and zoning review before closing.

8. Finalize Closing & Transition Plans

The final step is closing the transaction and planning for a smooth ownership transition. This includes:

• Signing closing documents and transferring funds.
• Updating business registrations, tax IDs, and permits.
• Transferring ownership of bank accounts, contracts, and vendor agreements.
• Announcing the ownership change to employees, vendors, and customers.

A clear transition plan helps maintain business continuity and reassures employees and customers.

Final Thoughts: Protect Your Investment

Buying a business is a major investment, and skipping legal steps can lead to costly surprises. Conducting due diligence, structuring the purchase correctly, and securing a legally sound agreement can protect you from unexpected liabilities.

If you’re considering buying a business, we can help ensure the transaction is legally sound. Contact us today for expert guidance on navigating your purchase with confidence!

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This article is a service of Dolev Law, a Personal Family Lawyer® Firm. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Life & Legacy Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Life & Legacy Planning Session™.

Disclaimer

The information provided in this blog is intended for general informational purposes only and does not constitute legal advice. Overtime pay laws, salary thresholds, and other employment regulations are subject to change, and their application can vary depending on specific circumstances and jurisdictions. We recommend consulting with a qualified attorney or human resources professional to address your specific legal needs or compliance questions. This blog should not be relied upon as a substitute for personalized legal advice. Reading this blog or contacting our firm does not establish an attorney-client relationship. If you need assistance with employment law compliance or other legal matters, feel free to reach out to us to discuss your specific situation.