Mind your Business: The First Time Buyer

By Steve Michaels

Question: I am considering purchasing an answering service. I am a first time buyer, and I am aware of the importance of performing due diligence on the business prior to the purchase. What else should I do?

Answer: In performing due diligence, don’t forget to include a lien search. A lien is a legal right of interest that a creditor has in an asset, which lasts until the obligation is paid or satisfied. Performing a lien search reveals if the seller of the business has liens against the business; all liens should be paid or satisfied prior to the purchase. These liens can vary in their description and importance depending on the creditor.

Some of the more common liens are state and federal tax liens. Being aware of the existence of these liens is crucial for the intended buyer. Check the lien type, status, and amount owed. These liens must be paid in one of two ways: either before the sale of the business (make sure that the lien has been released by the state or federal authorities) or after the sale where funds have been set aside specifically to pay for the liens, usually from an attorney’s escrow account.

The buyer should never allow the seller to pay tax liens after the sale – no matter how ardent the promise. Unpaid tax liens can result in automatic closure of the business, or the tax lien can become the liability of the new owner.

Lien searches can also list judgment filings, bankruptcy filings, collection history, and UCC (Uniform Commercial Code) filings. Similar to tax liens, a UCC filing should be satisfied before the sale of a business or from the sale proceeds after the sale. A UCC is filed as a security interest in an asset such as equipment, property, or even client base until the seller has paid the debt in full. This is especially important if the buyer is purchasing equipment or other assets along with the client list.

A lien search can also give an interested buyer a general idea of the seller’s business practices and management skills, which can have an impact on the buying decision and the price.

Lien search information can be obtained from any search engine.

Steve Michaels is a business broker and can be contacted at 800-369-6126 or tas@tasmarketing.com for questions.

[From Connection Magazine December 2007]