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Business/Corporate Law

Purpose of a lawyer in due diligence.

Purchasing a business can be a serious endeavour.  It is not as simple as buying a computer for your child and you need expert advice to know what you are purchasing and conducting the necessary due diligence to avoid any potential issues.

When you buy a business, you could be purchasing assets, inventory, trademarks,  associated goodwill of the company or the shares of an existing corporation.   Many questions have to be considered from legal, tax and whether the acquisition is a sound business decision. Sometimes,  the acquisition of a business is to eliminate a competitor from the market.

A simple example illustrates what can go wrong when you do not have all of the information relating to a purchase. Suppose you are interested in purchasing a business where one of the key assets is a delivery truck.  You may be told by the business owner that he owns everything in the company, including the truck.  After you agree to the purchase and pay for it, you later find out that in fact the truck was leased.  As a purchaser, you assumed that the purchase price included the price of the truck, but now you would need to pay additional funds. In addition, the vendor had no right to sell you that truck in the first place because it was never owned by him.   The leasing company maintains security over the truck and has the right to seize it.

Such a scenario is easily avoidable. Without doing the proper searches, a purchaser may be left completely in the dark about the ownership of a particular asset.  This is why it is important to consult with a lawyer in even the simplest of transactions so that the due diligence is performed and you are fully aware of your rights.

In the early stages of deciding whether you want to acquire a business, it is important to have experienced legal counsel on your side.  Just like you will conduct your diligence on the computer you are buying for your child, you should be doing more of an extensive due diligence on the business. Review may include but not limited to, financial, legal, creditors, employees, trademarks, and the list can go on and on.

It is typical for many businesses to require potential purchasers to sign a Non-Disclosure Agreement (NDA) in order to protect the privacy of a business. The NDA would contain information on things such as financial statements, customer lists, suppliers, employees, salaries, equipment, any assets, and any major contracts that may be necessary on an ongoing basis for the company.  Consult with a lawyer before you sign such an agreement to ensure that you are not making any overreaching legal commitments to the other

Ultimately what a lawyer provides is the information you need to make a calculated decision about your venture.  Through legal searches a lawyer can inform you of your risks, if any, who owns a business, the assets of that entity, whether there are any liens on property held, unpaid taxes and any ongoing litigation that may impact your decision to acquire the business. Having this information on your side makes you that much more prepared for all the challenges that exist with the purchase and operation of a successful business.

Contact a member of our team to assist you.