Buying an existing business in Washington can offer a faster path to market entry, built-in customer relationships, and immediate revenue, but only if the acquisition is handled with care. One of the most critical steps in the process is due diligence.
Due diligence matters. It’s where you dig into the details of the business operations, such as contracts, finances, and obligations, to see what’s behind the offer. In Washington, a smart buyer doesn’t just rely on surface numbers or assumptions but takes the time to review everything with a legal lens before signing on. Having a business law firm on your side for this can help you significantly.
Confirm the Entity’s Legal Standing
One of the first steps in a business acquisition is confirming that the business is properly formed and in good standing with the State of Washington. This involves more than checking that the company exists. You need to verify whether the entity has kept up with required filings, licenses, and legal obligations. If the company is operating under a trade name, confirm that the name is registered and valid.
Issues like missed annual report filings, lapsed licenses, or administrative holds can delay closing or impact the entity’s ability to lawfully complete the sale. Before moving forward, it’s worth requesting documentation directly from the Secretary of State and local licensing agencies to ensure everything is in order.
How to Spot Red Flags in the Numbers
A business can look profitable on paper while hiding financial red flags. That’s why reviewing the financials is a core part of due diligence. This should include a multi-year review of profit and loss statements, balance sheets, cash flow reports, tax returns, and any outstanding liabilities.
The goal here isn’t just to confirm income. You should look for trends, inconsistencies, or unpaid obligations that might transfer with the business.
In Washington, you’ll also want to pay close attention to B&O (business and occupation) tax compliance. If you’re purchasing the entity itself rather than just its assets, you may be inheriting those tax liabilities unless steps are taken to limit your exposure. A tax clearance from the Department of Revenue can help reduce that risk.
Contracts, Leases, and Legal Commitments
Every contract the business enters, whether it’s with customers, suppliers, or a landlord, has the potential to impact your ownership after closing. Some contracts may automatically renew or include early termination penalties.
Other contracts might not be assignable without third-party approval, which could hold up the transaction or require renegotiation. You’ll want to go beyond just reading the terms.
Ask how contract functions in practice:
▪ Are key customers locked in under long-term contracts, or is revenue month-to-month?
▪ Is there a lease in place that still has multiple years remaining? Is the lease assignable?
▪ Can supplier and vendor contracts be terminated on 30 days notice?
▪ Are there contracts that are due for renegotiation soon?
These kinds of details shape both risk and value.
What to Watch For on the Employment Side
If the business has employees, it’s important to understand how the company is handling wages, benefits, and labor law compliance in Washington. This includes whether employees are properly classified, whether the business is following local sick leave ordinances, and whether any employee disputes, formal or informal, are ongoing.
You should also review the employment handbook (if one exists) and ask whether any independent contractors have been with the company long-term. Misclassification is a common issue that can lead to back pay, penalties, or IRS scrutiny.
Intellectual Property Ownership and Digital Assets
For many businesses, especially startups or digital-first companies, intellectual property can be one of the most valuable assets. However, ownership isn’t always as clear as it should be. Logos, software, product designs, and even domain names need to be formally assigned to the business entity. If they’re still in the name of a founder or third party, transferring them cleanly may take time.
Lotus Law can help with startup legal services, and check whether the business has protected its intellectual property through trademarks, copyrights, or patents. Even if the company operates locally, digital content and brand assets often have national exposure and should be reviewed accordingly.
Know the Legal Baggage Before You Inherit It
Any legal history tied to the business, like open disputes, past litigation or unresolved claims, should be on your radar early. That includes everything from vendor contract issues to government investigations. Public records can tell you a lot, but they don’t always paint the full picture. Ask the seller directly for disclosures about any current or expected legal problems and conduct a state and county level search for liens, bankruptcies, court orders and pending litigation .
Even a closed case can leave behind reputational damage or unresolved obligations. If there’s been a lawsuit or regulatory issue, dig into how it was resolved. If there’s a pending dispute, don’t assume it’ll stay minor. Legal risks don’t go away just because ownership changes hands.
What Assets Are Part of the Deal?
One of the more overlooked parts of due diligence is verifying what you’re buying. Inventory, equipment, and physical space might be listed on paper, but it’s your job to confirm ownership, working condition, and whether those assets are free of liens or claims.
For businesses that lease space, the lease terms should match what you’ve been told. If the company owns real property, you’ll want the title history, zoning status, and confirmation that no encroachments or easements interfere with operations. This is also where working with a commercial real estate lawyer can help flag issues that aren’t always obvious at first glance.
With asset purchases, here’s what to confirm:
▪ The seller has the legal authority to transfer each asset
▪ The assets are in good working order
▪ No third-party security interests exist
▪ Any leased or financed equipment is clearly identified
▪ Intellectual property and customer data are properly included or excluded
If it’s not written into the agreement, you may not own it after closing.
Environmental Risks Aren’t Always Obvious
Even if a business seems clean on the surface, environmental risk can be buried deeper, especially if the company handles hazardous materials or is located on older or repurposed land. In Washington, the Model Toxics Control Act (MTCA) gives state regulators broad authority, and liability can follow the property, not just the owner who caused the issue.
For that reason, environmental due diligence often includes:
▪ A Phase I Environmental Site Assessment
▪ A review of Department of Ecology reports and notices
▪ Any known history of spills, contamination, or remediation on-site
These steps matter even if you’re not buying the real estate itself. Long-term leases and past operations can create liability for future operators.
Why the Deal Structure Needs to Be Right from the Start
How you structure the acquisition will directly affect your tax exposure, liability, and how smoothly the business transitions to your ownership. Buyers work with a small business lawyer and tax professional to choose to purchase the company’s assets, while others take on the full legal entity as a unit, interest or stock purchase. Each approach has trade-offs.
The sooner you get legal insight, the smoother things go. Connect with Lotus Law to review your deal before you commit.