What Should I Investigate Before Buying a Business?
Before buying a business, verify its financial records (tax returns, financial statements and bank deposits), customer concentration, employees and key-person risk, contracts and leases, legal and regulatory exposure, and the condition of equipment and systems. Most detailed investigation happens after you sign a Letter of Intent, during a defined due diligence period. Verify everything independently with your accountant and attorney before you close.
For executives who manage risk for a living and want the same discipline applied to their own acquisition.
What happens after signing a Letter of Intent to buy a business?
The Letter of Intent sets the price, structure and timeline. Signing it starts the most important phase of the deal:
- Exclusivity beginsThe seller typically agrees to stop marketing the business while you complete your review.
- Due diligence requestsYou and your advisors request and review financial, legal, operational and employee documents.
- Lender underwritingYour lender reviews the business and your file, and orders any required appraisals.
- Purchase agreementAttorneys draft the definitive agreement, incorporating what diligence uncovered.
- ClosingFunds transfer, documents are signed and ownership changes hands.
- TransitionThe seller trains you and introduces you to customers, suppliers and staff, as agreed.
What documents do I need to review before buying a business?
Financial
Several years of business tax returns, P&Ls and balance sheets, year-to-date statements, bank statements, AR/AP agings, add-back support, debt schedules.
Legal
Entity documents, leases, licenses and permits, pending or past litigation, liens, insurance policies, intellectual property.
Customers & sales
Revenue by customer, contracts and their assignability, pricing history, pipeline and retention.
People
Organization chart, payroll, compensation and benefits, key-employee roles, employment and non-compete agreements.
Operations
Equipment list and condition, inventory, supplier agreements, systems and software, standard operating procedures.
How do I verify a business’s financial statements?
- Tie the P&L to tax returns. Reported revenue and profit should reconcile to filed returns.
- Tie revenue to bank deposits. A proof of cash confirms sales actually landed in the bank.
- Document every add-back. Owner perks and one-time expenses need receipts or clear records.
- Review trends month by month. Look for seasonality, recent drops or unusual spikes.
- Check working capital. Understand receivables, payables and inventory you will inherit.
- Bring in a CPA. For larger deals, a quality-of-earnings review adds another layer of confidence.
What are the red flags every executive should investigate before buying a business?
- 1. Numbers that don’t reconcile between financials, tax returns and bank deposits.
- 2. Undocumented add-backs or a long list of “cash” adjustments.
- 3. Customer concentration: a few customers driving most of the revenue.
- 4. Owner dependence: relationships or know-how that live only with the seller.
- 5. Declining recent trends the seller cannot explain.
- 6. Key employees likely to leave or unwilling to commit.
- 7. Lease problems: short term, no assignment rights or a big rent increase.
- 8. Deferred maintenance on equipment, vehicles or facilities.
- 9. Legal, tax or regulatory issues: liens, lawsuits, unpaid taxes, licensing gaps.
- 10. Reluctance to share information or a vague reason for selling.
A red flag does not automatically kill a deal. It may change the price, the structure or the protections in the purchase agreement. The goal is to find it before closing, not after.
What questions should I ask before buying a business?
- Why are you selling, and why now?
- What does your typical week look like, and who handles what when you are away?
- Which customers, suppliers and employees are most important, and how will they react to a sale?
- What would you do to grow the business if you were staying?
- What capital investments will the business need in the next few years?
- How long will you stay to support the transition, and would you consider seller financing?
What are the biggest mistakes buyers make during due diligence?
- Falling in love with the deal and explaining away warning signs.
- Going it alone without an advisor, attorney and CPA who know acquisitions.
- Running out of time because the diligence period in the LOI was too short.
- Under-planning the transition for customers, employees and suppliers.
How does ESS help buyers through due diligence?
We help you build a clear diligence plan, assemble your attorneys and accountants, keep requests organized, interpret what you find and negotiate how issues are handled, so you close with confidence.
Identify the right business
We map what you love, your skill sets, the schedule you want and your income goals, then brainstorm industries where your corporate experience gives you an edge.
Find listed and off-market deals
We search active listings and tap off-market opportunities through our intermediary network, so you see businesses many buyers never hear about.
Value the opportunity
As a Certified Valuation Analyst, Jason helps you test the seller's numbers, normalize cash flow and judge whether the price is supported.
Structure the funding
We connect you with SBA lenders and help you blend bank debt, seller financing and your own capital, with the focus where lenders put it: cash flow.
Negotiate the LOI and terms
Jason is a Certified Master Negotiation Expert. He helps you craft the Letter of Intent and negotiate price, terms and transition support.
Manage diligence through closing
We help you assemble your team of attorneys and accountants, organize due diligence and keep the deal moving to the closing table.
Every consultation includes our free Buyers Guide to Successful Acquisitions.
DBA · CVA · CMAP
Why do buyers trust Dr. Jason J. Hubler?
Dr. Jason J. Hubler is a Certified Valuation Analyst, Certified Merger & Acquisition Professional and Certified Master Negotiation Expert who has guided Main Street and lower middle-market transactions from LOI to closing since 2013.
- Doctorate of Business Administration (DBA), Leadership Studies
- Certified Valuation Analyst (CVA)
- Certified Value Builder (CVB)
- Certified Master Negotiation Expert (CMNE)
- Certified Merger & Acquisition Professional (CMAP)
- Business Intermediary & M&A Advisor, Main Street and lower middle market, since 2013
- 25+ years in sales and entrepreneurial ventures
- President, Pennsylvania Business Brokers Association
- Member: IBBA, NACVA and M&A Source
- 120+ businesses sold
“…I am laser focused on helping buyers buy small main street and lower-middle market businesses, helping buyers overcome their challenges and fears…”
— Dr. Jason J. Hubler
Based in York, Pennsylvania. Serving buyers nationwide, 100% confidential.
A guided process, start to finish
Kevin L. of Sparkle Wash in York, PA bought a business with six-figure cash flow with Jason as his advisor, and later bought a second, complementary service business.
“Jason guided the whole process.”
Kevin L., Sparkle Wash, York, PA
Questions about due diligence when buying a business
What should I investigate before buying a business?
Verify the financial records against tax returns and bank deposits, and review customer concentration, employees and key-person risk, contracts and leases, legal and regulatory matters, and the condition of equipment and systems. Use your accountant and attorney to confirm what you find.
What happens after signing a Letter of Intent?
Signing the LOI usually begins an exclusivity and due diligence period. You review documents, your lender underwrites the loan, attorneys draft the purchase agreement, and then you close and begin the transition with the seller.
What documents do I need before buying a business?
Typically several years of tax returns and financial statements, bank statements, add-back support, customer and revenue data, leases and contracts, licenses, employee and payroll records, equipment lists and insurance policies.
How do I verify a business's financial statements?
Reconcile the profit and loss statements to filed tax returns, tie reported revenue to bank deposits, require documentation for every add-back and review monthly trends. For larger deals, a CPA quality-of-earnings review adds confidence.
What are the biggest red flags when buying a business?
Common red flags include numbers that do not reconcile, undocumented add-backs, heavy customer concentration, owner dependence, unexplained declines, key employees at risk, lease problems, deferred maintenance, legal or tax issues and a seller reluctant to share information.
How long does due diligence take when buying a business?
It depends on the size and complexity of the business and is set in the Letter of Intent. Build in enough time to review everything and complete lender underwriting, and extend the period in writing if needed rather than rushing.
Don’t buy a business until you’ve investigated it properly
Schedule a confidential call with Dr. Jason J. Hubler to talk through a deal you are evaluating or plan your next acquisition. Your consultation includes our free Buyers Guide to Successful Acquisitions.