Financial diligence: trust tax returns, verify everything
- 3 years of tax returns — the seller's P&L says what they want; returns say what they told the IRS. Discrepancies are a conversation, not necessarily a dealbreaker — but get the explanation in writing.
- Bank and merchant statements — match deposits to reported revenue; cash-heavy businesses deserve extra skepticism.
- Seller's discretionary earnings (SDE) — the real owner benefit once one-time costs and owner perks are added back (see our companion guide on pricing). Scrutinize every add-back.
- Customer concentration — if one customer is 30% of revenue, your offer should reflect that risk.
Legal and transfer diligence
- The lease — often the deal's hidden landmine: confirm remaining term, transfer/assignment rights, and the landlord's consent early.
- Licenses and permits — which ones the business needs, which transfer, and which you must apply for fresh (liquor licenses and regulated trades take time).
- Liens and litigation — a UCC search shows what's pledged as collateral; ask directly about disputes and check court records.
- Contracts and employees — supplier agreements, key-employee status, and any change-of-control clauses that trigger on sale.
- Asset vs. stock purchase — most small deals are asset purchases (cleaner liability-wise); the structure changes taxes and risk for both sides, so get professional advice.
Operational diligence: the week-in-the-life test
Spend real time in the business before closing. Watch the flow of customers, meet key staff (as appropriate), and pressure-test the biggest question: how much of this business is actually the current owner? Their relationships, skills, or license walking out the door is the most common post-sale disappointment — negotiate a training/transition period and, where appropriate, a non-compete.
How buyers pay for it
- SBA 7(a) loans — the workhorse of small-business acquisitions: commonly around 10–15% down with 10-year terms, but expect a personal guarantee, a full underwrite of both you and the business, and a longer closing timeline.
- Seller financing — the seller carries a note for part of the price, often 10–50%. Beyond bridging a financing gap, it keeps the seller invested in a smooth transition.
- Cash / buyer equity — fastest close and strongest negotiating position; most deals combine some of all three.
Deal protections that matter
- Contingencies for financing, lease assignment, and license transfer
- Reps and warranties from the seller about the accuracy of the books
- An escrow holdback or seller financing — a seller with skin in the game after closing believes their own numbers