Buying into an existing business: what to check first

More than the financials, and the documents matter as much as the numbers.

The entity itself

• Is it in good standing in every state it operates in?

• Are annual reports current?

• Is it registered where it actually does business, or only where it was formed?

An entity behind on filings is a problem you're buying.

The operating agreement

This is the document that will govern your life as an owner. Read it before you agree to anything.

• Can you be forced out? Some agreements let a majority buy out a minority on terms the minority doesn't control.

• What are your voting rights? A minority interest may come with no meaningful say.

• Can you get out? If there's no buyout mechanism and no market for a minority interest, your money may be in permanently.

• How are distributions decided? If the majority can simply not distribute, profits on paper mean nothing.

What you're inheriting

• Existing debts and guarantees.

• Pending or threatened disputes.

• Employment arrangements. Leases and their guarantees.

• Contracts with change-of-control provisions that your purchase might trigger.

The tax questions

• How is the entity taxed, and does that work for you?

• Are there elections in place that constrain what you can do?

• What's your basis after the purchase, and how does that affect an eventual exit?

The one people skip

What happens if the existing owners want to sell to someone you don't want as a partner? Tag-along and drag-along provisions matter enormously to a minority owner, and they're either in the agreement or they're not.

What to do

Read the operating agreement before the financials. The numbers tell you what the business is worth. The agreement tells you what your share of it is actually worth.

This is general information, not legal advice for your situation. If you want an answer for your business, book a consultation.