Before You Buy a Business: Questions the Financial Statements Cannot Answer

The seller provides revenue, earnings and an asking price. The numbers seem to support a purchase. Before proceeding, determine how much of that performance can continue under new ownership.

Financial records are essential, but they need to be read alongside the people, contracts and operating practices that produce them.

Find out who owns the customer relationship

Ask how customers are acquired, why they stay and who handles their most important concerns. A strong customer list can be vulnerable if loyalty rests mainly with the departing owner.

Examine concentration, renewal dates and cancellation provisions with the relevant specialists. Have counsel review whether contracts can transfer and what permissions may be required.

Where practical and permitted by the transaction process, seek evidence beyond the seller's description: customer retention, service history and the way account responsibilities are distributed across the team.

Understand what the owner does

Write down the seller's actual working week. Include sales, technical tasks, supplier negotiations, staff management and emergency decisions.

Then estimate how those responsibilities will be covered after closing. A seller's discretionary adjustment or add-back should not be accepted automatically. Ask the accountant or transaction adviser which costs will recur for you and how much replacement management would require.

The question is what cash the business can sustainably produce with your intended staffing and operating model.

Establish the cash needed after closing

The purchase price does not describe the complete funding requirement. Ask what receivables, payables, inventory and cash will transfer, how working capital will be measured and what adjustments the agreement provides.

Review equipment condition, deferred maintenance and near-term obligations. A business may generate acceptable earnings while needing a substantial replacement purchase shortly after acquisition.

Prepare a forecast for the transition. Payroll, suppliers and debt payments begin whether the handover feels complete or not.

Design the handover before relying on it

Identify key employees, essential permissions, technology access and supplier relationships. Document the seller's transition obligations rather than treating informal availability as a dependable plan.

What happens if a key employee leaves? Who trains the replacement? Which systems require access that currently belongs to the seller personally?

The SBA's business-planning resources include guidance on buying an existing business or franchise. Your own diligence should bring financial, legal and operational findings together before a binding commitment.