Buying a Small Business: What to Check First

Why is the owner selling?

Ask early and listen to how it is answered. Retirement, health, a move or another venture are common and usually honest. A seller who is vague, or who is leaving because a large customer is leaving, a landlord is raising rent or a competitor just opened, is giving you information. Try to confirm the reason from someone other than the seller, such as a long-time employee or a supplier.

Also ask how much of the business is the owner. If customers call because of the owner’s name and relationships, those customers may not stay after the sale. A business that runs through its systems and its staff is worth more than one that runs through one person.

Check the books against the bank

Ask for several years of tax returns, profit and loss statements, balance sheets and bank statements, and have your accountant compare them. Sales on the statements should match deposits in the bank. Look at how profit is calculated: does it include the owner’s pay at a realistic level? Are personal expenses mixed in? Is there a large customer that makes up most of the sales?

Understand what is being sold: equipment, inventory, customer lists, the name, the website, the phone number and social accounts, the lease. Make sure the things that matter will actually transfer to you. A domain, a Google profile or a phone number controlled by a former web designer can be a surprising problem.

Customers, staff and the lease

Ask how customers have been won and kept. If most come from one source, such as a single referral partner, a platform or one search term, find out how stable it is. Speak with a few customers if the seller allows it.

Meet the key employees. Find out their pay, their contracts and whether they intend to stay. For a location-based business, read the lease carefully: the length, the rent increases, whether it can be assigned to you and what the landlord requires. A great business with a lease that expires next year is a negotiation, not a bargain.

• Tax returns, profit and loss and bank statements that agree with each other
• A clear list of what transfers: assets, name, domain, accounts, lease
• Customer concentration and how customers are found
• Key employees and whether they will stay
• Pending claims, debts, liens and licenses in good standing

Price, structure and help

Businesses are commonly valued as a multiple of the owner’s annual earnings, and the multiple depends on the industry, the size and the risk. Whatever number the seller proposes, work out what you would need to earn to pay for the purchase, pay yourself and cover the loan, and decide whether the business can plausibly do that.

Bring in an accountant and an attorney who handle small business sales. They will review the structure, whether you buy assets or the company, how the debts are handled, and what protections go in the contract. The fee is small next to the price of the business.