The Importance of Due Diligence for Buyers
In the business world, buyers and sellers are held to a standard of prudence and reasonable diligence. This means that as a buyer, you have a responsibility to receive and thoroughly investigate materials related to the business you are purchasing. This process is known as due diligence, and it is one of the most critical steps in any business transaction.
Due diligence encompasses a wide range of investigation. You should be reviewing financial statements, tax returns, and the books of account, including QuickBooks or whatever accounting software the business uses. Accounts receivable require careful examination to understand what money is actually owed to the business and how collectible those receivables are.
If real estate is involved in the transaction, due diligence likely includes a personal inspection of the property. Depending on the nature of the business, you may also need to hire a professional inspector or conduct an environmental assessment to identify potential liabilities associated with the property.
The consequences of skipping due diligence can be severe. Courts will hold buyers accountable for what they knew or should have known going into a business purchase. If you fail to investigate and later discover problems, you may have no legal recourse because you could have discovered those issues had you done your homework. The business world can be unforgiving in this regard, making thorough due diligence absolutely essential.
The Seller’s Responsibility to Disclose
While buyers bear significant responsibility for investigating a business, sellers have their own obligations. As a seller, you never want to be in a position where you are accused of withholding important information about the business. Such accusations create significant legal exposure and, at minimum, lead to long, drawn-out court cases that benefit no one.
Smart sellers take a proactive approach to disclosure. Document everything you disclose to the buyer. Fill out exhibits and schedules to the purchase agreement thoroughly and completely to reflect all disclosures that have been made. The goal is over-disclosure—providing so much information that no one can ever accuse you of causing a surprise or hiding something material.
Think of it as creating a paper trail that protects you. When everything is documented and disclosed upfront, buyers cannot later claim they were deceived or that important information was withheld. This approach protects sellers from litigation and helps ensure the transaction closes smoothly.
Common Pitfall: Trusting Too Much
One of the most frequent pitfalls in business transactions occurs when the buyer and seller already know and trust each other. They assume that their existing relationship excuses them from the formalities of investigating the business and documenting the transaction properly.
This assumption is a mistake. If you have a friendship with the person you are doing business with, that relationship is actually an argument for doing more due diligence, not less. The purpose is to preserve the friendship. Business transactions inevitably produce surprises, and those surprises will affect the relationship if they are not addressed properly from the beginning.
Do not skip over your research and due diligence simply because of a prior relationship with the buyer or seller. Treat the transaction professionally, document everything, and protect both the business deal and the personal relationship.
Common Pitfall: Using the Same Broker
A second common pitfall occurs when both the buyer and the seller are represented by the same broker. This arrangement creates inherent conflicts because the broker is incentivized to push through a deal rather than advocate strongly for either party’s interests.
Agreements that emerge from these situations tend to be middle-of-the-road compromises. They are often ambiguous and wishy-washy, with language that could be interpreted either way. Neither party ends up knowing exactly where they stand, and the ambiguity creates fertile ground for future disputes.
Unfortunately, many of these problematic agreements surface six months after the purchase when disputes arise. At that point, resolving the issues is far more expensive than it would have been if both the buyer and seller had retained their own attorneys from the beginning to identify their interests and advocate for them properly.
Common Pitfall: Handshake Deals
The third major pitfall is the quick and dirty agreement—the deal made on a napkin or sealed with a handshake. There was perhaps a time when this approach worked in business, but that time has passed. The complexity of today’s business environment makes informal agreements inadequate.
Modern business owners face challenges from multiple directions: government regulations, customer expectations, vendor relationships, and supplier requirements. Operating on a handshake leaves you without clear footing when any of these challenges arise. A real, comprehensive agreement is essential to protect your interests and provide clarity about everyone’s rights and obligations.
The Excitement and Responsibility of Business Transactions
Whether you are buying or selling a business, the transaction represents an exciting moment in your life. For sellers, it is time to move on to a new chapter—perhaps a new business venture, retirement, or finally taking that trip around the world. For buyers, it represents stepping into a potentially new life that will change your family, your community, and allow you to make a bigger impact on the world.
With that excitement comes responsibility. The world will treat you as a sophisticated business actor, regardless of your actual experience level. You need to rise to that expectation by assembling the right team of professionals who can guide you through the process and set you up for success.
This means working with attorneys who understand business transactions, accountants who can analyze financial records, and valuation professionals who can confirm you are paying or receiving a fair price. The investment in professional guidance pays dividends by helping you avoid costly mistakes and position the transaction for success.
Talk to Sierra Crest Business Law Group Today
If you have questions about buying or selling a business in Nevada, Sierra Crest Business Law Group is here to help. The team assists clients throughout Reno with business transactions, due diligence, purchase agreements, and the many legal considerations that arise when businesses change hands.