A lot of what you need to know before buying a small business is in the seller’s head, and very little of it makes it into the listing or the financial statements. The only way to get it out is to ask, and then ask again when the first answer sounds rehearsed.
The numbers show what a company earned. They don’t show who earned it, or whether that person is staying. Anyone serious about buying a small business should walk into the first real meeting with a written list of questions, and the list below is grouped by customers, staff, operations and the seller’s reason for leaving. It ends with a check that doesn’t depend on anything the seller says.
That last check is about the company as a legal entity. If a business is registered with a state, there is a file on it, and that file doesn’t care how good the pitch was.
Start with the customers, because they can walk
A business is worth what its customers keep paying it. So start there.
Ask how much of the revenue comes from the top five customers. If one account is a big share of sales, the deal is really a bet on that one relationship. And relationships don’t always transfer. Find out whether those customers have written contracts and how long the contracts run. Then ask whether the contracts can be assigned to a new owner. Some agreements require the customer’s consent before a change in ownership, so read the assignment clause in each one.
Then the uncomfortable one: “Which customers did you lose in the last two years, and why?” A seller who says “none” is probably running an unusual business. Or leaving something out.
Two more on customers. How do new customers find the business today? And do the best customers deal with the owner personally? If they do, you’ll want to know how the owner plans to introduce you and how long that handover will take.
Find out who actually runs the place
Staff questions are easy to skip because they feel intrusive. Skip them and you may find out, a month after closing, that the one person who knew where everything was has handed in notice.
Ask which employees the business can’t run without, and what happens if each of them leaves. Ask how long they’ve been there and how their pay compares with similar jobs locally. Then ask whether any of them know the business is for sale. The answer to that last question tells you a little about the seller’s planning. It also hints at how the staff will take the news of a new boss.
Family members on the payroll get their own question. A family member may be essential. Or they may be drawing a salary for work nobody else would pay for, and that changes the real cost of running the place once they leave.
And ask whether anyone who works there is classified as an independent contractor instead of an employee. The IRS says the label doesn’t decide it. What counts is the actual relationship, judged by behavioral control, financial control and how the two sides relate to each other. Have an accountant or attorney look at any worker whose status is unclear.
Operations are where the surprises live
Leases and supplier terms are dull reading. They deserve the most time anyway.
Start with the lease. Ask how many years are left on it and what happens to the rent at renewal. There is a real difference between a lease that runs for years and one that ends soon. Ask too whether the lease can be assigned to a buyer, or whether the landlord has to sign off on a new one. A great business in a location it’s about to lose is not a great business.
Suppliers next. Is there a vendor the business can’t function without? Are the pricing terms written down, or do they rest on a handshake with the current owner? (A handshake belongs to the person who made it.)
Then equipment and systems. What needs replacing in the next few years Which software runs the books, the scheduling, the inventory and the payroll, and who has the passwords? Ask which licenses and permits the business operates under and whether they carry over to a new owner. Some don’t, so find out which ones before closing, not after.
Finally, ask the seller to walk you through a normal week, hour by hour if they’ll do it. What do they do that nobody else does? That is the gap between “the business runs itself” and an owner who is there six days a week, and after closing it becomes your gap to fill.
Every seller has a good answer to “Why are you selling?”
Retirement. A move. Burnout. A new opportunity. All of those are real reasons, and they are also the easiest things to say.
On its own the answer is worth very little. What matters is the fact that it has to fit with everything else you’ve heard. A seller retiring after decades in the business might be expected to have steady numbers and a staff that knows the routines. A seller “pursuing other opportunities” whose revenue dipped last year, and whose biggest customer just renegotiated, deserves a second and much slower conversation.
Then ask about timing. Why now, and not a year ago? Ask what the seller plans to do after the sale and whether they’d stay on through a transition period. It’s also fair to ask whether they’d agree not to open a competing business nearby. State law decides how far that kind of agreement can go. California, for example, lets someone who sells a business agree with the buyer not to run a similar business in the area where the sold business operated. The details are a question for a lawyer. Coffee won’t settle them.
If the seller can’t explain the timing without changing the subject, treat that as an answer.
Check the one thing the seller can’t spin
Every question so far relies on the seller telling the truth. This one doesn’t.
Look up the business in its state’s business entity records to see whether it’s registered and in active status. The state’s business filing office is the place to start.
A state record can tell you more than you might expect. Depending on the state, it may show the entity’s current status, when it was formed, and who is listed as its registered agent. If you buy the company, you’ll decide whether to keep that agent or replace it. For a California company, where the state calls the role an agent for service of process, compare California registered agents before closing.
A bad status is worth taking seriously. A company that has fallen out of good standing with its state may face limits on what it can legally do, and those problems don’t go away just because the owner changes.
Get the exact legal name from the seller first, because the name on the sign can differ from the one on the state record. A business run as a sole proprietorship won’t show up in a state entity search at all, since sole proprietors don’t register with the state.
If the status reads suspended, forfeited, inactive or anything other than active, ask why. Find out what it would take to fix before going further. How much the entity’s history affects you turns on how the purchase is structured, which is a question for a lawyer or accountant.
A missed filing is one way a company loses its standing. In Florida, for example, an LLC that hasn’t filed its annual report by the third Friday in September is administratively dissolved, according to the Florida Division of Corporations. The state guides Steve Goldstein writes at LLCBuddy lay out the recurring filings each state expects, which makes it easier to see what the seller let slip. Then confirm it on the state’s own record, since a few minutes of searching can keep you from buying a company whose standing has lapsed.
The listing sells the business. The answers describe it.
None of these questions needs special expertise. What they need is patience, and a willingness to sit through a long pause while the seller decides how candid to be.
Write the answers down and hold them up against the documents. Then check them against the state record.
You’ll end up owning the business the answers describe. The listing was only the ad for it.
