Three Overlooked Areas to Investigate Before Buying

By Michael D. Rubin, CEO & Founder · Updated September 2026 · 805 words

Buyers tend to check the financials thoroughly and then skim three areas that can cost just as much: the company's retirement plan, how its workers are classified, and whether its legal documents and intellectual property are in order. A problem in any of them can follow the business to its new owner, sometimes years after closing.

Due diligence, the detailed investigation after your offer is accepted and before the purchase is final, is the eighth of the ten steps in a sale. Here is what to look for in each of the three areas, and how to protect yourself when you find something.

1. The retirement plan: compliance, not just generosity

Many owners set up a 401(k) or similar plan years ago and have not opened the paperwork since. A plan carries ongoing obligations: annual filings, prompt deposit of the money withheld from employees' pay, nondiscrimination testing, and plan documents that must be amended when the rules change. A plan that has fallen behind can bring penalties and the cost of corrective contributions, and in a purchase of the company itself those become the new owner's problem. Ask for:

• The plan document, its amendments and the most recent annual filings
• Records showing when employee deferrals were withheld and when they reached the plan
• Testing results, and any correction the plan provider has flagged
• Any non-qualified arrangement, such as deferred pay promised to a manager, that the company will still owe after you buy it

2. Worker classification: 1099s that should have been W-2s

Paying people as independent contractors, reported on a 1099, rather than as employees on a W-2 saves a company payroll taxes, benefits and overtime. It is legitimate only when the worker is genuinely independent: deciding how and when the work is done, using their own tools, free to work for others. Crews who keep set schedules under the company's direction, wear its shirts and drive its trucks rarely qualify, whatever the paperwork says.

Misclassification can leave the company owing back payroll taxes, penalties and unpaid overtime. It can also leave the buyer with a workforce that must be moved onto payroll after closing, at a higher cost than the financials show. Ask for a list of everyone paid on a 1099 in the last three years, what each person did and what they were paid. Read the employee handbook and written policies too; they show how the company actually manages people and whether its practices match its own rules.

3. Legal documents and intellectual property

Your price assumes the company owns what it uses and holds the agreements it claims to hold. Check each of these:

• Trademarks and domain names registered to the company, not to the owner or a former employee
• Software, websites and designs built by contractors, with written assignments transferring ownership to the company
• Invention and confidentiality agreements with employees who develop products or processes
• Customer and supplier contracts, including any clause that lets the other party end the contract if ownership changes
• Leases, licenses and permits, and whether each can be transferred to you
• Corporate records showing the entity is in good standing, ownership is documented and major decisions were properly approved

What to do when you find a problem

Finding an issue is not automatically a reason to walk away. Many are fixable before closing; the real question is who pays. Deal structure matters here. In an asset purchase, the buyer generally takes on only the assets and liabilities it agrees to, while a purchase of shares or membership interests brings the company's history with it. Our explainer on selling assets or ownership interests lays out the trade-offs. Ask your attorney as well about unpaid sales and payroll taxes, which in some circumstances can follow a business to its buyer.

The purchase agreement is your other tool. The seller's representations and warranties (formal statements that certain facts are true) and an indemnity (a promise to cover your losses if they are not) give you a remedy, often backed by part of the price held in escrow for a period after closing. The representations and warranties a seller should expect are the same ones you will negotiate from the buyer's side. Your transaction attorney and CPA decide how much protection a particular finding needs.

How MDR & Associates handles diligence for sellers

MDR & Associates represents sellers, and part of our work is helping owners find and fix issues like these before a buyer does. Every company we take to market has a financial recast and a confidential marketing package, and due diligence runs through an organized document request rather than a scramble. Buyers still need their own CPA and attorney; clean records on our side simply make that review faster and the closing more predictable. To see companies that are currently for sale, visit buy a business.

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Questions owners ask next

Who pays to fix a compliance problem found during due diligence?

That is negotiated. The seller may fix it before closing, reduce the price, or agree to leave part of the proceeds in escrow until the exposure is resolved. Your attorney recommends the right protection based on how large and how likely the potential cost is.

Does an asset purchase protect me from all of the seller's liabilities?

Not always. It usually limits what you take on, but some obligations, including certain tax and employment liabilities, can follow a business in particular circumstances. Ask your transaction attorney to review what could carry over in your specific deal before relying on the structure alone.