How to Find Hidden Contracts and Agreements When Buying a Business
How to Find Hidden Contracts and Agreements When Buying a Business
What you don’t know can hurt you.
And, if you are buying a business, what you don’t know can be disastrous!
Before you run away from buying any business, consider this: the whole due diligence process is focused on revealing what you don’t know.
When you start the due diligence process, you know very little about the business (good or bad). But, you gradually know more as you analyse the detail in the financial statements, scrutinise the tax records, and investigate operational systems.
Your mission (and you must accept it) is to know more about the business than the current owner. I agree - that’s a big ask!
While you will cover the obvious issues, uncovering hidden contracts and agreements is one critical area that’s sometimes overlooked.
These can significantly impact the value of the business and your ability to operate it successfully after the acquisition. Here's how to identify and assess these agreements to ensure no surprises post-purchase.
But first, let’s get clear on
Why Hidden Contracts Matter
Business contracts and agreements can include supplier contracts, lease agreements, employment contracts, partnership deals, or customer obligations.
The business must satisfy any obligations included to avoid penalties. They could also introduce unexpected liabilities or restrict your ability to operate.
So, locating and understanding all contracts and agreements is critical for any new owner.
It’s time to play hide and seek!
Where Hidden Contracts and Agreements Might Be Found
Operational Records:
Review documents such as vendor invoices, purchase orders, and shipping records. You are looking for recurring suppliers or service providers whose agreements might not be disclosed.
Accounting and Financial Records:
Regular periodic payments or large one-off payments can indicate the existence of contracts. Look for expense items related to supplier agreements, property leases, or licences.
Employee and Payroll Records:
Employment contracts often contain restrictive clauses like non-compete agreements or performance incentives. Ensure these are considered, as they may affect your staffing decisions.
Legal Correspondence:
Correspondence with legal advisors may disclose ongoing disputes, pending claims, or future contract renewals. These documents may indicate agreements (or future liabilities) that aren’t immediately visible in operational or financial records.
Customer and Vendor Relationships:
Long-standing relationships with customers or suppliers often involve informal or undocumented agreements and will be challenging to find. Interview those who deal with purchases or sales to identify verbal commitments or handshake deals that might need formalisation.
Now that you know where to look, let’s consider how to look.
Steps to Uncover Hidden Agreements
1. Conduct a Document Audit
Request a comprehensive list of all existing contracts and agreements. Match those documents with financial and operational records. This process will identify possible missing agreements.
2. Interview Key Personnel
Speak with employees and managers with operational knowledge of the business. They might reveal undocumented (and undisclosed) agreements. For various reasons, the seller may resist this step.
3. Review Meeting Minutes
Request meeting minutes if the business has a formal board or leadership team. These may reference discussions about agreements or partnerships not otherwise documented.
4. Check for Regulatory Obligations
In regulated industries, some contracts (e.g., licensing agreements) must comply with legal standards. Verify these obligations with relevant regulatory bodies.
5. Hire Specialists
Engage a business lawyer to review all agreements (disclosed and discovered) thoroughly. Legal expertise won’t help find undisclosed agreements but can help identify hidden risks and ensure you know all relevant terms.
Get Started!
Hidden contracts and agreements can significantly affect a business's value and operational flexibility. By following the steps above, you can be confident you have a complete picture of the contractual obligations you are acquiring with the business.
Addressing these early in the process ensures you’re making an informed decision and protects you from surprises that could jeopardize your investment.
Tags: buying a business legals contracts due diligence
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