Buying a business is not the same as buying a product. You’re taking on history, relationships, obligations, and risk. A seller may present everything in the best possible light, and that’s expected, but it’s your responsibility to verify what you’re actually getting before you sign anything.
Our friends at Kravets Law Group work with buyers who want to go into a transaction with their eyes open. The due diligence process is where that clarity comes from, and it starts with knowing exactly what to look for and where to find it.
Start With the Business Entity Itself
Before you evaluate a single financial statement, confirm the basics. Is the business properly registered? Is it in good standing with the state? Are there any administrative dissolutions or lapses in filing?
You can verify an entity’s status through the Secretary of State business database. This will show you the company’s formation date, registered agent, and whether it’s currently active. It’s a small step, but it tells you a lot about how the business has been managed.
Review Litigation History
Lawsuits tell a story. You want to know if the business has been involved in any past or pending litigation, whether as a plaintiff or defendant. Employment disputes, breach of contract claims, personal injury cases, and regulatory actions can all signal deeper problems.
Search court records at both the state and federal level. Many county courts offer online case search tools, and federal cases can be found through the PACER system. Don’t stop at the business name alone. Search the owner’s name and any known DBAs as well.
Examine Financial and Tax Records
A seller’s financial statements should be reviewed carefully, but they shouldn’t be the only source of information you rely on. Request at least three years of tax returns, profit and loss statements, balance sheets, and bank statements.
Look for inconsistencies: revenue that doesn’t match tax filings, unusual expense categories, or sudden changes in profitability right before the sale. These aren’t always signs of fraud, but they do warrant further investigation. An accountant can help with the numbers. A business purchase lawyer can help you understand what the numbers mean for the deal itself.
Investigate Liens and Debts
Outstanding debts can follow a business through a sale, depending on how the transaction is structured. You’ll want to conduct a UCC lien search to identify any secured creditors with claims against the business’s assets.
Other debts to look for include:
- Unpaid federal or state taxes
- Outstanding vendor invoices or supplier balances
- Unresolved judgments from prior lawsuits
- Equipment loans or financing agreements still in effect
- SBA or other government-backed loan obligations
Any of these can become your problem if they aren’t identified and addressed in the purchase agreement.
Check Licenses, Permits, and Regulatory Compliance
Depending on the industry, the business may require specific licenses or permits to operate. Verify that all of them are current and transferable. Some licenses can’t be assigned to a new owner and will need to be reapplied for, which could delay your ability to operate after closing.
Also check whether the business has faced any regulatory actions, fines, or compliance violations. State agencies, OSHA records, and industry-specific regulatory bodies are all worth reviewing.
Talk to People
Not everything shows up in a database. Speaking with employees, customers, vendors, and even neighboring businesses can give you insight that documents alone won’t provide. Are customers happy? Do suppliers have concerns about unpaid invoices? Is there high employee turnover?
These conversations don’t replace formal due diligence, but they add important context. Sometimes the most valuable information comes from a five-minute conversation with a long-time employee.
Protect Yourself With the Right Agreement
Everything you uncover during due diligence should inform the terms of your purchase agreement. Representations and warranties, indemnification provisions, and escrow arrangements all exist to protect buyers from risks that surface after closing. Skipping this step, or rushing through it, can leave you exposed.
If you’re preparing to buy a business and want to make sure you’ve done your homework before committing, working with an attorney who understands acquisitions can make the difference between a sound investment and a costly mistake.