43 Questions to Ask When Buying a Business
Due diligence questions for a small business you are considering buying: why the owner is selling, what the accounts really show once their own expenses are stripped out, customer concentration, debt and leases, who holds the knowledge, staff and licences, and the terms of the handover. Ordered roughly as a deal progresses, from first meeting to signing.
The questions
Open any question for the note
Why are you selling, and how long has it been on the market?
Why ask it
Retirement, ill health, divorce and boredom are ordinary reasons. A business that has been listed for two years, or relisted after a failed sale, usually failed for a reason you will find later, so ask what happened with the previous buyer and who walked away.
How did you arrive at the asking price?
Why ask it
You want the method, not the number: a multiple of earnings, a broker's estimate, or what they need for retirement. Prices based on a seller's requirements rather than the trading figures tend to be the most negotiable, and the answer tells you how much the accounts have been examined already.
What has revenue been in each of the last five years, and what explains the changes?
Why ask it
Five years shows you the shape rather than one good quarter. Look for a decline dressed up as a plateau, and for the year the owner decided to sell, which is often the year revenue peaked. Ask for the current year to date alongside the same period last year.
Can I see tax returns and bank statements alongside the accounts?
Why ask it
Management accounts are prepared to be read; tax filings and bank statements are much harder to shape. Where the two disagree, the difference is the conversation. A seller unwilling to show filed returns at any stage of due diligence has effectively answered the question.
Which of your personal costs run through the business?
Why ask it
In owner-managed businesses expect a car, phone, travel, sometimes family on the payroll. These add-backs raise the true earnings and therefore the price, so the seller has an incentive to be generous with them. Ask for evidence for each one, because unsupported add-backs are where inflated valuations begin.
What are the earnings once add-backs and a market salary for my role are counted?
Why ask it
The figure that matters is what is left after paying somebody to do what the owner does. Many small businesses look profitable only because the owner works sixty hours for less than a manager would cost. Do that arithmetic yourself before discussing price again.
What are the gross and net margins, and how have they moved?
Why ask it
Falling gross margin means costs are rising faster than prices, which is a pricing power problem rather than a cost problem, and it rarely fixes itself. Ask what changed: a supplier, a discount to a large customer, a shift toward lower-margin work.
Which costs are fixed and which move with sales?
Why ask it
This tells you what happens in a bad year. A business with high fixed costs, rent, salaried staff, leased equipment, has a much higher floor of trading it must maintain to survive. Ask what the monthly break-even figure is and compare it with the worst month last year.
What does cash flow look like month by month across a full year?
Why ask it
Annual profit hides the months where money leaves before it arrives. Seasonal businesses can be profitable and still fail on timing. You are looking for how deep the troughs are, what funds them, and whether tax and rent fall in the same weeks as the quiet season.
How much working capital does the business need to keep running?
Why ask it
Buyers routinely spend everything on the purchase and leave nothing for stock, wages and receivables. Ask what is normally tied up in inventory and unpaid invoices, and whether the sale includes any of it, because a business handed over with empty accounts needs funding from day one.
What debt does the business carry, and what would remain after the sale?
Why ask it
Get the list: loans, equipment finance, credit cards, invoice factoring, deferred tax, money owed to the owner. Then ask what is being cleared at completion and what follows the business. Factoring in particular changes how cash arrives and is often described as a facility rather than debt.
Are there liens on any assets, or personal guarantees behind the debts?
Why ask it
Equipment can be financed rather than owned, which means it does not transfer with the business however it looks in the asset list. Personal guarantees signed by the current owner may need replacing with yours, and that is a condition your lender and your solicitor need to see early.
What share of revenue comes from your largest customer, and from the largest five?
Why ask it
This is the single most common way a small acquisition goes wrong. If one customer is a quarter of revenue, you are buying a relationship rather than a business, and that relationship is usually with the person selling. Anything above a fifth deserves a deal structure that accounts for it.
How long have your main customers been with you, and are any at risk?
Why ask it
Ask when each was last up for renewal or retender, and whether any have reduced their spend recently. Sellers often know that a large account is going and time the sale accordingly, so it is worth asking directly whether anyone has signalled a change.
Are customer contracts assignable to a new owner?
Why ask it
Many contracts contain a change of control clause, which means the customer can walk or renegotiate when you buy. In some sectors nothing is in writing at all, which is a different risk. Ask to read the top five contracts rather than a summary of them.
Where do new customers actually come from?
Why ask it
Test whether demand comes from something transferable, such as search, location, referrals from a trade, or from the owner personally being known locally. The second kind leaves with them. Ask them to walk you through the last ten customers and how each arrived.
What does it cost to win a customer, and what is one worth over time?
Why ask it
Small businesses often have no idea, and working it out yourself from the marketing spend and the number of new customers is one of the most useful hours of your diligence. If acquisition costs have been rising while margins fall, growth is more expensive than it looks.
What has customer retention been over the last three years?
Why ask it
Repeat business is what you are paying a multiple for. Look for churn concentrated in one product line or one location, and ask what happened to the customers who left. Sellers rarely track this, so ask for the raw sales ledger and count returning names yourself.
Which products or services actually make the money?
Why ask it
Expect a small part of the range to carry most of the profit, with a long tail that occupies staff and space for very little. That is an opportunity, and it is also a warning: if the profitable line depends on one supplier, one contract or one skilled employee, the business is narrower than it appears.
When did you last raise prices, and what happened?
Why ask it
A business that has not raised prices in years usually either has no pricing power or an owner who is afraid to ask. The first is a problem you inherit; the second is the easiest improvement available to you. Their answer tells you which.
What assets are included, what condition are they in, and when will each need replacing?
Why ask it
Ask for an itemised list with ages and service records, then have anything substantial inspected. Deferred maintenance is a real part of the price: a roof, a van fleet or a production line at the end of its life is a capital bill arriving in your first year.
What inventory is included, how is it valued, and how much of it will never sell?
Why ask it
Stock is usually valued at cost, which flatters anything obsolete, damaged or seasonal. Ask for an ageing report and count a sample yourself. It is normal for a large share of a long-standing stockroom to be worth only what it would fetch at clearance.
What are the premises arrangements, how long is left, and is the lease transferable?
Why ask it
For a location-dependent business the lease can matter more than the accounts. You need the remaining term, the rent review dates, any personal guarantee, the landlord's consent process, and the repair obligations at the end, which can be a substantial hidden liability.
Is any property, equipment or intellectual property owned by you personally rather than by the business?
Why ask it
In owner-managed companies the building, the vehicles, the trademark or the domain are often held outside the business. Anything you need must be in the sale or in a lease you can rely on. This question regularly uncovers something nobody had thought to mention.
What systems does the business run on, and who controls the accounts, domains and data?
Why ask it
Ask who holds the administrator rights, the domain registration, the social accounts, the payment gateway and the customer records, and whether any of it sits with a relative or a former contractor. Recovering a domain or a review profile after completion can take months.
Which suppliers matter most, what are the terms, and are they in writing?
Why ask it
Preferential pricing built on a personal relationship of twenty years may not survive the handover, and exclusive distribution agreements often contain change of control clauses. Ask whether you can speak to the main suppliers before completion, even if only through the seller.
What one thing, if it stopped tomorrow, would break this business?
Why ask it
A blunt question that gets a surprisingly honest answer: one customer, one machine, one licence, one member of staff, one platform's algorithm. Whatever they name is the risk you are actually buying, and it should shape the price and the structure of the deal.
Which parts of the daily work only you know how to do?
Why ask it
You are looking for undocumented knowledge: pricing decisions, the quoting method, which customers get exceptions, how the old machine is coaxed along. The longer this list, the longer the handover you need and the more the deal should depend on their staying to explain it.
How many hours a week do you work, and doing what?
Why ask it
Ask them to describe last week specifically. Sellers describe a two-day-a-week lifestyle business and then turn out to answer the phone from seven in the morning. If the true figure is sixty hours, either you are buying that life or you are buying a manager's salary you have not budgeted for.
Who are the key staff, what are they paid, and what are they contracted to?
Why ask it
Get the full payroll with roles, length of service, pay, hours and notice periods. Long-serving employees carry accrued rights that transfer with them, and their pay may be well below what a replacement would cost, which quietly changes your cost base if any of them leave.
Do any staff know the business is for sale, and how do you expect them to react?
Why ask it
Timing matters and so does obligation: employment rules in many countries require consultation with staff before a transfer, and getting it wrong is expensive. Ask which employees are likely to leave when they hear, because in a small business two departures can be most of the capability.
What is staff turnover, and which roles are hard to fill?
Why ask it
High turnover in one role points at either the pay or the person managing it. In skilled trades, a vacancy that takes six months to fill is a constraint on the whole business, and it also tells you what your options are if a key employee leaves after completion.
Are wages at the market rate, or would I have to raise them?
Why ask it
Profitability built on underpaid long-standing staff or unpaid family labour does not survive a change of owner. Price a couple of the roles against current advertisements. If the gap is significant, subtract it from the earnings figure before you go any further.
What licences, permits and registrations does the business need, and do they transfer?
Why ask it
Some transfer with the entity, some are personal to the holder, and some require a fresh application that takes months. This is the item most likely to stop you trading from day one, so check it before you spend money on anything else.
Are there any open disputes, claims, unpaid taxes or regulatory matters?
Why ask it
Ask about customers, employees, suppliers, landlords and the tax authorities separately, because people answer a general question narrowly. An unpaid tax arrangement is common in small businesses and is not necessarily fatal, but it must be documented and reflected in the price.
What inspections apply to this business, and what did the last one find?
Why ask it
Environmental, food safety, fire, electrical and industry-specific inspections all leave a paper trail, and the reports are more candid than anything you will be told. Ask for the last two, and ask what was required and whether the work was actually done.
What insurance is in place, what has been claimed, and what is not covered?
Why ask it
The claims history is a map of what goes wrong here: floods, injuries, faulty work, vehicle accidents. Rising premiums or a refusal of cover for a particular activity tells you something the accounts do not, and gaps in cover become your liability on day one.
Who are your competitors, what do they charge, and has anyone new arrived?
Why ask it
Sellers describe a stable market until pressed for names. Check the prices yourself as a customer would, and look for a well-funded new entrant or a national chain opening nearby. The competitor a small business does not mention is usually the one taking its work.
What is happening in this market that will matter in three years?
Why ask it
You want to know whether you are buying into decline: regulation, technology, a shift in how customers buy, a key contract moving to tender. A seller who has been in the trade for decades will usually tell you honestly if asked as an industry question rather than as a criticism of their business.
What have you tried here that did not work?
Why ask it
Saves you repeating it, and it shows how the business responds to change. A seller who has tried nothing in ten years is offering you either an untouched opportunity or a business that has been coasting on old relationships, and the accounts will tell you which.
What would you fix first if you were staying?
Why ask it
Almost every owner has a list, and being asked as a colleague rather than as a buyer usually opens it. It is also the most efficient way to find the problems they have decided not to volunteer, because most people would rather explain a fault than be caught concealing it.
Is this an asset purchase or a share purchase, and what does that mean for liabilities and tax?
Why ask it
The structure decides what follows you. Buying assets generally leaves past liabilities behind but can break contracts, licences and employment continuity; buying shares takes the history with it, including claims not yet known about. Get advice specific to your jurisdiction before agreeing which.
Will you stay on through a handover, for how long, and on what terms?
Why ask it
For a business dependent on the owner's knowledge and relationships, this is often worth more than a price reduction. Put it in writing with days, duties and payment, because a vague promise of being around for a while tends to evaporate once the money has cleared.
Will you agree not to compete or approach customers, and for how long and where?
Why ask it
Without this, a seller can open again nearby and take the customer list they know by heart. Restrictions must be reasonable in time and geography to hold up, so this is a question for your solicitor as much as for the seller.
How much of the price are you willing to leave dependent on the business performing after I take over?
Why ask it
Deferred payments and earn-outs are the practical answer to any seller assurance you cannot verify: customer loyalty, retention of a key account, the accuracy of the forecast. A seller who insists on the whole sum at completion is telling you where their confidence really lies.
Running the diligence
Practical guidance for the conversation itself
A workable order
- 1First meeting: why they are selling, how the price was set, what the business does, and how much of it depends on them. No documents needed to spot most deal-breakers.
- 2Sign a non-disclosure agreement, then request the pack: five years of accounts and tax filings, twelve months of bank statements, payroll, the lease, the main contracts, and the asset list.
- 3Rebuild the earnings yourself from the bank statements and returns rather than accepting a summary. Test every add-back against evidence.
- 4Verify externally: company filings, court and judgment searches, tax registration, licence registers, online reviews, and a look at the premises during trading hours.
- 5Visit at the busiest and quietest times, unannounced if the seller agrees to it, and count customers or jobs yourself.
- 6Bring in professionals for the items where a mistake is expensive: an accountant on the numbers, a solicitor on the contracts and structure, a surveyor or engineer on the premises and plant.
- 7Make an offer subject to conditions, then use the exclusivity period for the deeper checks: staff, customers, suppliers, and anything the accounts left unexplained.
- 8Agree the handover in writing at the same time as the price, including days on site, what is taught, introductions to customers and suppliers, and the restrictions on competing.
Verify rather than accept
Trace the money, not the story
Revenue claimed should appear in the bank statements and in what was declared to the tax authorities. Cash businesses are where this diverges most, and undeclared takings are worth nothing to you: you cannot bank them, borrow against them, or sell them on.
Speak to people other than the seller
Customers, suppliers, neighbouring businesses and former employees will each tell you something the seller has framed differently. Do it with the seller's knowledge where confidentiality requires it, and pay attention to anyone who seems unsurprised that the business is for sale.
Work out what the business is worth to you
The price should reflect earnings after paying someone to do the owner's job, the capital you will need for stock and working capital, and the cost of the repairs and replacements you have identified. That figure is often well below the asking price, and knowing it is what lets you walk away calmly.
Plan the first ninety days before you sign
Who tells the staff and when, who introduces you to the main customers, what you will not change in the first month, and who answers the phone if the owner is unavailable. Most value destroyed in a small acquisition happens in the handover rather than in the negotiation.
Keep your own list of unanswered questions
Anything you asked and did not get a straight answer to belongs on one page, revisited before you commit. Unanswered questions cluster around the real problem, and a pattern of deflection matters more than any single item on the list.
Reasons to slow down or stop
- Tax returns or bank statements are not made available at the point where an offer is expected.
- One customer represents a large share of revenue and the relationship is personal to the seller.
- Revenue has fallen for two years and the explanation changes each time you ask.
- The lease is short, not transferable, or carries obligations nobody wants to quantify.
- Key equipment turns out to be financed, leased, or owned personally by the seller.
- The seller will not agree to any restriction on competing, or to any part of the price being deferred.
- You are being pushed toward completion by a deadline that belongs to the seller rather than to the business.
- The books are reconstructed, incomplete, or kept by someone who is unavailable to speak to you.