Buyer's guide ยท 4 of 5
Due diligence checklist for buying a small business
What to check between the letter of intent and closing. Use it with your CPA and attorney; it does not replace them.
Money: do the numbers hold up?
- Tax returns against the profit and loss. Ask for three years of business tax returns and match them to the seller's statements. Lenders lend on what the returns show, so income the seller says was not reported will not help you qualify.
- Bank statements. Deposits should support the reported sales. Twelve months is a fair ask.
- Seller's discretionary earnings. Go through every add-back, such as the owner's pay, personal expenses and one-time costs, and ask for proof. Remember that you will need to pay yourself, or someone, to run the business.
- Trends. Sales and margins by month for at least two years, plus a recent interim statement. Look for seasonality and a decline the asking price ignores.
- Customer concentration. How much revenue comes from the largest five customers, and will they stay?
- Working capital. Receivables, payables and inventory: how much cash the business needs to run month to month after you take over.
Legal: can it move to you?
- The lease. Years left, renewal options, rent increases, and whether the landlord must consent to an assignment. Lenders often want the lease to run at least as long as the loan, and a landlord waiver.
- Licenses and permits. Many are personal or need a new application in your name: liquor, contractor, childcare, health and professional licenses. Find out how long that takes.
- Contracts. Customer, supplier, franchise and distribution agreements: can they be assigned, and does anyone have to approve?
- Successor tax liability. In many states a buyer can become liable for the seller's unpaid sales or other state taxes unless the buyer gets a clearance or holds back part of the price. Each state page on this site notes the rule where we could confirm it from an official source; your attorney should confirm it for your deal.
- Lawsuits, liens and judgments. Search for them against the business and the seller.
- Asset or stock purchase. Most small deals are asset purchases, which leave most old liabilities with the seller. Your CPA and attorney should weigh the tax and liability effects.
Operations: does it work without the seller?
- Owner dependence. What the owner does every week, and who could do it. In a full acquisition financed with an SBA loan, the seller may stay on only as a consultant, for up to 24 months.
- Employees. Who the key people are, what they are paid, and whether they will stay. Check that workers are classified correctly as employees or contractors.
- Equipment and property. Age, condition and maintenance records. Get an inspection or appraisal for anything expensive. If property is part of the deal, expect an environmental review.
- Systems. Bookkeeping, scheduling, point of sale, website, domains and online accounts: who owns them and how they transfer.
- Reputation. Online reviews, complaints and inspection reports.
Financing: will a lender agree?
- Does the business's past cash flow cover the loan payments 1.25 times? The SBA rules.
- Do you have at least 10% of the total project cost, from sources that count? The down payment page.
- Is the price likely to hold up in the lender's valuation?
- Is every owner a U.S. citizen or U.S. national living in the United States or its territories?
The $99 Loan-Ready Packet checks the financing side for a specific deal and lists the documents you still need. Each listing links straight to whoever listed it; Humble Business Brokerage is not in the middle.
General information, not legal, tax or lending advice.