Buying a Business: Due Diligence Essentials

What you don't know about a target company can cost more than the purchase price.

Acquiring a business — whether through an asset purchase, stock purchase, or merger — is one of the most consequential transactions a company or individual can undertake. The letter of intent sets the framework, but due diligence determines whether the deal should close at all.

Here's what we focus on when guiding buyers through the process.

Corporate and Organizational Records

Before anything else, confirm the basics:

Good standing — Is the entity current with the Illinois Secretary of State?
Authorized signers — Does the seller actually have authority to sell?
Ownership structure — Are there minority owners, silent partners, or encumbrances on equity?
Governing documents — Operating agreements, bylaws, and shareholder agreements may contain transfer restrictions, rights of first refusal, or consent requirements

A deal can fall apart at closing if the seller can't deliver clean title to the business interests.

Financial Review

The financials tell you what you're really buying. Look at:

Three to five years of tax returns and financial statements
Accounts receivable aging and accounts payable obligations
Outstanding debt, liens, and guarantees
Revenue concentration — is 80% of revenue from one customer?
Working capital trends and cash flow patterns

For asset purchases, identify exactly which assets transfer and which liabilities the buyer assumes. Illinois law (the Bulk Sales Act, 810 ILCS 5/6) may apply to certain asset transfers.

Contracts and Commitments

Review every material contract the business is party to:

Assignment provisions — Can existing contracts be assigned to the buyer, or do they require counterparty consent?
Change of control provisions — Some contracts terminate automatically on a change of ownership
Non-compete and exclusivity obligations — These may limit the buyer's operations post-closing
Lease agreements — Real property and equipment leases often require landlord or lessor consent to assign

Employee and Benefit Matters

People are often the most valuable asset in a business acquisition:

Employment agreements, non-competes, and severance obligations
Benefit plans (health, retirement, equity) and any unfunded liabilities
Pending or threatened employment claims
Key employee retention — will the people who make the business work stay?

Regulatory and Compliance

Depending on the industry, regulatory due diligence may include:

Licenses and permits required to operate
Environmental compliance and potential remediation obligations
Pending or threatened litigation
Tax compliance across all jurisdictions

Transaction Structure

The structure of the deal — asset purchase vs. stock purchase vs. merger — has significant implications for:

Tax treatment for both buyer and seller
Liability assumption — asset purchases generally allow buyers to leave unwanted liabilities behind
Third-party consents required to close
Successor liability risks under Illinois law

The Bottom Line

Due diligence is not a checklist exercise — it's a risk assessment. The goal is to understand what you're buying, what you're taking on, and whether the purchase price reflects reality. Every issue uncovered in due diligence is either a negotiating point, a deal term adjustment, or a reason to walk away.

Get in touch if you're considering a business acquisition and need guidance on structuring the transaction and conducting due diligence.