Short answer: Before you sign to buy a Michigan business, check the seller's books, debts, liens, taxes, lease, licenses and contracts. In Michigan, a buyer can be held responsible for some of the seller's unpaid state taxes unless money is held back in escrow until the seller gets a tax clearance from the Department of Treasury. Most problems are much cheaper to find before closing than after.

Buying a gas station, restaurant, party store, medical office or service company can be a great move. But the purchase agreement is where you protect yourself. Here are ten things we tell buyers to check before signing anything binding.

1. Who actually owns what you're buying

Look up the seller's company on the State of Michigan (LARA) business entity search. Confirm it's active, who the officers or members are, and that the person signing has authority. Decide early whether you're buying the assets or the company itself (its stock or LLC membership interests). Buying the company usually means you take on its past problems too.

2. Real financials, not just a summary

Ask for at least three years of tax returns, profit and loss statements, bank statements and sales records. Compare them. If the seller says the business makes more than the tax returns show, treat that as a red flag, not a selling point.

3. Liens and secured debts

Run a UCC lien search with the Michigan Department of State, and check for tax liens and judgments. Lenders, equipment companies and merchant cash advance funders often file liens on inventory, equipment and receivables. Your agreement should require that every lien be paid off and released at closing.

4. Michigan taxes: escrow and tax clearance

Under Michigan law (MCL 205.27a), a buyer of a business or its assets can become personally liable for the seller's unpaid Michigan taxes, such as sales, use and withholding tax. The Treasury says contract language doesn't change this. The protection is to hold back enough of the price in escrow until the seller provides a Tax Clearance Certificate from Treasury. Only the seller can request it, so build that into the deal.

5. Unemployment tax and employees

A buyer can also inherit the seller's unemployment insurance tax debts and rating. Ask for the seller's UIA account information before your offer is accepted. Review payroll, any workers paid "off the books" or as contractors, unpaid wages, and which employees you plan to keep.

6. The lease

For most small businesses, the location is the business. Read the lease: how many years are left, renewal options, rent increases, and whether the landlord must consent to an assignment. Get the landlord's written consent and an estoppel letter confirming there are no defaults before closing.

7. Licenses and permits

Many licenses don't automatically transfer. A liquor license transfer, or a transfer of more than 10% of the interest in a licensed company, needs approval from the Michigan Liquor Control Commission. Also check city business licenses, health permits, lottery, tobacco and professional licenses. Make approval a condition of closing.

8. Environmental issues

Gas stations, auto shops, dry cleaners and industrial sites can carry contamination. If you're buying or leasing the property, a new owner or operator can get liability protection by having a Baseline Environmental Assessment (BEA) done before or within 45 days after taking over, and submitting it to EGLE within six months (Part 201 of Michigan's environmental code, MCL 324.20126).

9. Contracts, customers and lawsuits

Review key supplier, franchise, customer and equipment contracts, and whether they can be assigned to you. Search court records for pending or threatened lawsuits. Ask whether a few customers make up most of the revenue.

10. A purchase agreement that protects you

Your agreement should include clear seller promises (representations and warranties), an indemnity if those promises turn out false, a reasonable non-compete so the seller doesn't open across the street, an inventory count at closing, transition help, and conditions that let you walk away if financing, the lease or licenses fall through.

Watch the deadlines. Letters of intent and offers often have short due-diligence periods, sometimes just 10 to 30 days. Once that window closes, your deposit may be at risk. Get a lawyer involved before you sign the offer, not after, and don't release escrowed funds until the tax clearance and lien releases are in hand.

Quick pre-signing checklist

LARA entity search and signing authority confirmed
3 years of tax returns, P&Ls and bank statements reviewed
UCC, tax lien and judgment searches run
Tax escrow and Treasury tax clearance built into the deal
UIA account information and payroll reviewed
Landlord consent and estoppel letter in writing
License transfers (including MLCC) approved or a condition of closing
BEA considered for any property with environmental risk
Key contracts assignable; no hidden lawsuits
Indemnity, non-compete and walk-away conditions in the agreement

Learn more about our business law and dispute practice, or read what to do if your commercial landlord changes the locks.

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Attorney responsible for this content: Ali Moubarak (P81729), Moubarak Law Firm, P.C., 1 Parklane Blvd., Ste 729 E, Dearborn, MI 48126 · (313) 566-4802.

Attorney advertising. This article is general information, not legal advice, and laws change. Every case is different, and results in past cases do not guarantee a similar outcome. Contacting us does not create an attorney-client relationship.