I get it. You're ready to skip the startup grind and acquire something with traction. It's a smart move, but buying a business is like buying a used car: what's under the hood matters far more than the new paint. You're not just purchasing assets; you're inheriting someone else's wins, mistakes, and all their hidden problems. Every business has a story, and you need to uncover the unwritten chapters before you sign.
Think of me as your personal mechanic, and this guide as my checklist. I'm going to walk you through the ten most critical areas to investigate. I'll give you the specific questions to ask when buying a business that I and other experienced buyers use. We'll skip the generic advice. We will focus on the tough questions that separate a seven-figure rocket ship from a money pit in disguise.
Answering these will feel like a final exam, but passing it means you're buying a future you can actually build on. This list gives you a solid framework for your due diligence. You will understand the company’s real financial health, how it actually operates, and its true potential for growth. You need to know exactly what you're getting into, so you can build the success you're working so hard for. Let's get started.
1. Financial Health, Historical Performance & EBITDA Quality
Before you even think about an offer, you have to become a financial detective. Your first job is to dissect the business's financial statements: the income statement, balance sheet, and statement of cash flows. Think of these documents as the business's report card. They show you its true profitability and how it has managed cash for the last 3-5 years.
Your goal isn't to accept the seller's stated profit, often shown as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Your mission is to calculate a "normalized" or "adjusted" EBITDA. It's like finding a car's real miles per gallon, not the inflated number the dealer claims. You'll strip out one-time windfalls and personal owner expenses run through the business. This adjusted figure shows you the true, repeatable earning power you will inherit. To dive deeper into profitability, understanding the calculation of gross margin percentage is a crucial first step.
Key Questions & Actions
- Request & Verify: Ask me for at least three years of financial statements and the matching tax returns. You need to cross-reference them with bank statements to make sure the reported revenue is real. Any mismatch is a major red flag.
- Challenge Add-Backs: Sellers will "add back" personal or one-off expenses to pump up the EBITDA. You must scrutinize every single one. Was that "one-time marketing expense" truly a one-off, or is it a recurring cost you will have to pay?
- Analyze Owner's Compensation: Is the owner paying themselves a tiny salary for a job that would cost you $100,000 to fill? You must adjust the financials to reflect a market-rate salary. This will show you the real profit.
- Assess Margin Trends: Is revenue growing while profit margins shrink? This could mean rising costs to get customers or pricing pressure. Both threaten your future profits.
2. Customer Base Quality & Concentration Risk
A business with big revenue can be a house of cards if it leans on just a few customers. You must investigate the health and diversity of the customer base. This helps you understand the stability of the revenue streams you're buying. Think of it like an investment portfolio: you wouldn't put all your money in one stock. A business shouldn't have all its revenue tied to one or two clients.
Your job is to spot concentration risk. This is the danger that a big chunk of your income could vanish if one major customer leaves. Imagine a service firm where one client makes up 40% of revenue. That is extremely fragile. You also need to check how "sticky" customers are. A business that constantly has to find new customers just to stay level is far riskier than one with a loyal, recurring customer base.
Key Questions & Actions
- Analyze the Customer List: You should request a detailed, anonymous customer list showing sales per customer for the last three years. Calculate the revenue percentage from the top 5 and top 10 customers. If any single customer is more than 10-15% of total revenue, I see a red flag.
- Assess Customer Stickiness: Are customer relationships built on contracts, or just a personal bond with the owner that might not transfer to you? Ask the seller, "Which three customers would hurt the most to lose, and why are they loyal to the business, not just to you?"
- Evaluate Customer Acquisition Channels: Where do new customers come from? If a brand gets 70% of its sales from Facebook ads, you're inheriting massive platform risk. A simple algorithm change could destroy your sales pipeline.
- Check Retention & Churn: For any subscription or e-commerce business, you must analyze customer churn and repeat purchase rates. A low repeat purchase rate means you're on a constant, expensive treadmill just to replace lost customers, which eats away at your profits.
3. Intellectual Property & Brand Assets
When you buy a business, you're buying more than inventory. You are often buying its brand and the ideas that power it. Your next move is to become an IP investigator. You need to make sure the intangible assets you think you're getting are legally protected and fully transferable. This includes trademarks, patents, copyrights, and even secret recipes.
Failing to verify IP ownership can be a disaster. Imagine you buy a popular online store only to find out the seller never registered the trademark. You could be forced into an expensive rebrand or even lose the business’s online identity. A strong brand needs a solid legal foundation. You can see different approaches in these positioning brand examples.
Key Questions & Actions
- Create an IP Inventory: You need to ask me, the seller, for a complete list of all intellectual property. This should include registered trademarks, patents, domain names, social media handles, and any special software.
- Verify Ownership: Don't just take my word for it. You should use public databases like the USPTO for trademarks and WHOIS for domains to confirm the business legally owns them. Ask me for proof of a clean chain of title for all key assets.
- Review All Agreements: You must scrutinize supplier, contractor, and licensing agreements. Do you have clear ownership of the website code a freelancer built? You need written confirmation that all critical IP will be assigned to you at closing.
- Consult an IP Attorney: I consider this non-negotiable. You should have a qualified attorney review all documents, search for potential problems, and make sure the purchase agreement clearly assigns all IP rights to you, the new owner.
4. Revenue Model & Customer Acquisition Strategy
Understanding how a business makes money is as important as knowing how much it makes. You must investigate the engine that drives sales. Is the business built on a sustainable, scalable system? Or is it a house of cards propped up by my personal network or a single, risky marketing channel?
Your goal is to map the entire customer journey, from first contact to final sale. You need to identify any critical dependencies. For example, a brand that claims strong organic growth might actually spend 80% of its budget on Facebook ads, which means you face a future of shrinking margins. Similarly, if I am the only salesperson, you're making a high-risk purchase. My departure could crater your revenue. You're buying systems and processes, not just my charisma.
Key Questions & Actions
- Demand a Channel Breakdown: You should ask for a detailed report showing revenue by source for the last 12-24 months. How much comes from paid ads, organic search, or direct referrals? If an e-commerce store gets 90% of its sales from Amazon, I see that as a significant risk for you.
- Test for Founder Dependency: Ask me point-blank: "If you walked away tomorrow and I couldn't contact you, would new customers still come in?" My answer will reveal how much success is tied to my personal relationships versus transferable systems.
- Verify Acquisition Costs: Don't take my word for it. You need to calculate the Customer Acquisition Cost (CAC) and Lifetime Value (LTV). You should request direct, read-only access to my ad accounts (Google, Meta, etc.) to verify the data yourself.
- Assess Channel Ownership: You must determine if the marketing channels are "owned" or "rented." An owned asset, like a large email list, is incredibly valuable. A rented channel, like Facebook ads, means you are subject to the whims of algorithms and rising costs.
5. Operational Systems & Key Person Dependency
You're not just buying assets and customers; you're buying an engine. The critical question here is whether that engine is a well-documented system or a black box that only the current owner knows how to run. A business that relies heavily on the founder's secret knowledge isn't a business—it's a job you're buying, and a very risky one.
Your goal is to uncover "key person dependency." How much would the business crumble if the owner disappeared tomorrow? This dependency can hide everywhere: client relationships known only to the founder, or supplier passwords stored in their head. The true value of a business lies in systems that you can teach and transfer, not in the owner's personal magic.
Key Questions & Actions
- Ask the "Bus" Question: You should ask me directly, "If you got hit by a bus tomorrow and couldn't work for three months, what would happen to the business?" My answer will immediately reveal undocumented processes and dependencies.
- Request Documentation: Ask for all Standard Operating Procedures (SOPs), employee handbooks, and process diagrams. If these don't exist, it's a huge red flag. It means all the operational knowledge lives inside my head.
- Interview Key Staff: You need to talk to long-term employees and managers. Ask them how they make key decisions. Compare their answers to the official documentation to see if reality matches the manual.
- Analyze Supplier & Client Relationships: Investigate who manages the relationships with top suppliers and customers. If it’s just me, you risk losing that business the moment you take over. You should request copies of all supplier contracts and client agreements to verify the terms are official, not just handshake deals.
6. Legal Compliance, Contracts & Liabilities
When you step into my business, you inherit its entire legal history—the good, the bad, and the ugly. You're not just buying assets; you're buying contracts, obligations, and potential lawsuits. A deep dive into the legal paperwork is a must. It protects you from hidden problems that could cripple the company right after you take over.
Think of this as a home inspection for legal integrity. You need to check the foundation (licenses and compliance) and look for hidden pests (pending lawsuits or tax issues). A seller might "forget" to mention an ongoing lawsuit or that their key supplier contract can't be transferred to a new owner. You want to uncover these bombshells now, not later.
Key Questions & Actions
- Engage a Lawyer Early: Your first move should be to hire an experienced business attorney. They will review all contracts, spotting risks that you would easily miss. This is not a place where you should cut costs.
- Audit All Agreements: You must request and scrutinize every single contract: employment agreements, supplier contracts, and commercial leases. Pay special attention to clauses about termination, pricing, and change of control. Can a key customer walk away without penalty once you buy the business?
- Uncover Hidden Liabilities: You need to directly ask me about any past, current, or threatened lawsuits. Then, have your lawyer independently verify this. Check for any liens on assets, which could mean unpaid loans or taxes that you would become responsible for.
- Verify Regulatory Compliance: Make sure the business has all the necessary local, state, and federal licenses to operate legally. You must confirm that all tax filings are up-to-date to avoid inheriting a dispute with the IRS.
7. Market Position, Competition & Growth Runway
Buying a business isn't just about its past performance; it's about its future potential. You need to become an industry analyst. You have to understand where this business fits in its market and whether there's enough room for it to grow. A profitable business in a shrinking market is like a beautiful house on a sinking foundation—it's a risky investment.
Your mission is to evaluate the company's competitive "moat"—its defensible advantage. Is it a strong brand, exclusive supplier deals, or simply being the lowest-cost provider? A business without a clear reason for customers to choose it over others is vulnerable. A generic dropshipping store has no moat. A brand with a patented product in a growing health category has a fortress.
Key Questions & Actions
- Map the Battlefield: You should use tools like industry reports and Google Trends to check the market's health. Is it growing or declining? Identify your direct competitors and indirect competitors who solve the same problem.
- Define the "Why": Ask me directly, "Why do your best customers choose you over everyone else?" I should give you substantive answers like superior service or unique product features. Vague answers like "we're the best" are a red flag for you.
- Assess the Runway: What is the Total Addressable Market (TAM)? Is the business a small fish in a huge ocean with plenty of room to swim, or has it already captured most of its small pond? You need to see a clear path for you to scale the business.
- Look for Headwinds & Tailwinds: Are there regulatory changes or technological shifts that could hurt (headwinds) or help (tailwinds) the business? A company selling high-end baby products, for example, would benefit from a "baby boom" tailwind.
8. Customer Feedback, Satisfaction & Net Promoter Score
A business with high revenue but unhappy customers is a ticking time bomb. You are inheriting a relationship with the people who keep the lights on. You absolutely must look beyond the financial statements and gauge the health of the customer base. This means you have to dig into satisfaction metrics and online reviews to understand brand loyalty and predict future churn.
Your goal here is to get a true pulse on how customers feel. Metrics like Net Promoter Score (NPS), which measures how likely a customer is to recommend the brand, are invaluable. For example, a product with impressive sales but a low NPS score means you'll have to spend heavily on acquiring new customers just to stay afloat. Conversely, a service business with glowing testimonials suggests a loyal base that will stick with you through the transition.
Key Questions & Actions
- Analyze Reviews & Testimonials: You should request access to all review platforms (Google, Yelp) and read the negative reviews carefully. Look for recurring themes like poor service or product defects. Ask for customer testimonials and get my permission to speak with a few of them directly.
- Request Customer Metrics: Ask for the customer list, churn rate data, and any NPS surveys I have conducted. If I haven't run a survey, ask if you can send a simple one to a segment of my email list. High unsubscribe rates are also red flags for you.
- Investigate Social Proof: You need to examine the business's social media presence. Is there an active community of fans, or is it a ghost town of complaints? A vibrant community is a powerful asset that is very hard for you to replicate.
- Calculate Customer Lifetime Value (CLV): You must understand how much a customer is worth over their entire relationship with the business. A high CLV suggests customers are happy and loyal, which is a sign of a very healthy operation for you to take over.
9. Supply Chain, Inventory & Unit Economics
If you're buying a business that sells physical products, its supply chain is the central nervous system. You need to investigate the entire journey of a product, from raw materials to the customer's doorstep. A seemingly profitable brand can have a fragile foundation, with supplier issues or bloated inventory ready to crumble under your ownership.
Your goal is to understand the true cost and reliability of getting products made and delivered. A business might look good on paper, but if its primary supplier is unreliable or its warehouse is full of "dead" stock, you're buying a massive, expensive problem. You must confirm that the unit economics—the profit on each item sold—are healthy enough for you to sustain and scale the business.
Key Questions & Actions
- Deconstruct Unit Economics: You should request a detailed Cost of Goods Sold (COGS) breakdown for the top-selling products. This must include everything: materials, manufacturing, freight, and duties. What is the true profit on a single unit after all these costs, plus fulfillment and returns, are factored in?
- Audit the Supply Chain: Ask me for a complete list of suppliers, including contact info, contracts, and lead times. Is the business overly dependent on a single supplier? A business with one key relationship is a high-risk investment for you.
- Analyze Inventory Health: You must demand an inventory aging report. This shows you how long products have been sitting on the shelf. A lot of old stock is a major red flag, meaning you’ll have to write it off as a loss. You can dive deeper by using an inventory turnover formula to gauge efficiency.
- Assess Fulfillment Operations: How are orders picked, packed, and shipped? If they use a third-party logistics (3PL) provider, you need to review the contract and costs. You might find significant savings by renegotiating or switching providers, which could immediately boost your margins.
10. Founder Motivation, Reason for Selling & Post-Sale Transition
Beyond the spreadsheets, you are buying a business from a human being. Understanding my real reason for selling is one of the most crucial questions you can ask. My story will reveal potential hidden issues, my confidence in the business's future, and how smooth your transition will be.
Am I truly retiring, or am I fleeing a sinking ship? If I'm just burned out, I might be masking deep operational problems I couldn't solve. My motivation directly impacts the business's health and my willingness to support you after the sale. A smooth handover is critical, and a checked-out founder won't give you the training you need to succeed.
Key Questions & Actions
- Probe the "Why": You should start with "Why are you selling?" and follow up with "What would make you decide not to sell?" The second question often gets you the real story. If I say "a better offer," it's about money. If I hesitate, you need to dig deeper.
- Test Their Confidence: You can propose that a portion of the purchase price be paid through seller financing. If I truly believe in the business's future, I'll often be open to this. It shows you I have skin in the game. My refusal could be a red flag for you.
- Define the Transition Period: Don't accept my vague promise of "help." You need to negotiate a detailed 30-to-90-day transition plan. This agreement should specify my hours per week, key training responsibilities, and required introductions to clients and suppliers.
- Get It in Writing: You must ensure the purchase agreement clearly outlines what I will transfer (like intellectual property and client lists) and includes post-sale restrictions, like a non-compete clause, to protect your new investment.
10-Point Due Diligence Questions for Buying a Business
| Item | Implementation Complexity 🔄 | Resource Requirements ⚡ | Expected Outcomes 📊 | Ideal Use Cases 💡 | Key Advantages ⭐ |
|---|---|---|---|---|---|
| Financial Health, Historical Performance & EBITDA Quality | High — detailed accounting review, adjustments, and projections | CPA/financial analyst time, bank statements, 3–5 years of statements | Normalized EBITDA, realistic valuation inputs, hidden issues revealed | Acquisitions, valuation, financing and deal structuring | Reveals true profitability; reduces overpaying risk |
| Customer Base Quality & Concentration Risk | Medium — requires customer-level data and segmentation | CRM exports, analytics, customer interviews, churn data | Clarity on retention, concentration, LTV:CAC health | Revenue sustainability checks; identifying diversification needs | Identifies major-customer risk and retention gaps |
| Intellectual Property & Brand Assets | Medium–High — legal searches and ownership verification | IP attorney, WHOIS/domain checks, trademark searches | Clear transferability of brand assets and legal exposure | Brand acquisitions, licensing, cross-border sales | Secures legal rights; prevents post-sale brand disputes |
| Revenue Model & Customer Acquisition Strategy | Medium — channel analysis and unit-economics modeling | Ad-account access, analytics, marketing expertise | Understanding of scalable channels and growth levers | Scaling DTC/ecommerce and growth planning | Highlights scalable channels and actionable growth levers |
| Operational Systems & Key Person Dependency | Medium — SOP audits and staff interviews | Time with team, documentation review, operations consultant | Assessment of founder dependency and handover readiness | Turnkey buys; reducing operational risk after acquisition | Enables scalable ops and smoother transitions |
| Legal Compliance, Contracts & Liabilities | High — comprehensive contract and legal review | Business attorney, insurance review, contract repository | Identification of transferability issues and hidden liabilities | Contract-heavy businesses; pre-closing risk mitigation | Protects buyer from legal and financial surprises |
| Market Position, Competition & Growth Runway | Medium — market research and competitor mapping | Industry reports, SEM/SEO tools, analyst time | Realistic growth ceiling and defensibility evaluation | Market-entry decisions and strategic positioning | Assesses scalability and long-term market fit |
| Customer Feedback, Satisfaction & Net Promoter Score | Low–Medium — surveys and review analysis | Survey tools, review scraping, customer interviews | Measure of loyalty, churn risk, and product-market fit | Retention improvement, quality validation, post-acquisition planning | Signals genuine customer loyalty and problem areas |
| Supply Chain, Inventory & Unit Economics | High — COGS breakdown and supplier reliability checks | Supplier audits, inventory reports, financial modeling | True per-unit profitability and working capital needs | Product brands, scaling physical goods, margin analysis | Reveals margin sustainability and supply vulnerabilities |
| Founder Motivation, Reason for Selling & Post-Sale Transition | Low–Medium — interviews and verification | Time with founder, reference checks, negotiated terms | Insight into deal risk, transition quality, and seller incentives | Ensuring smooth handover and cultural fit post-acquisition | Aligns expectations; often predicts post-sale success |
Your Next Move: From Questions to a Confident Offer
You’ve reached the end of my interrogation, but it’s just the beginning of your journey. This list of questions to ask when buying a business isn't a simple checklist for you to breeze through. Think of it as an MRI for a business. It's meant to reveal the hidden fractures, strong bones, and true health of the company you’re considering. The answers you uncover will form the bedrock of your valuation, your transition plan, and your strategy for growth.
This process isn't about finding a flawless business. Let me be clear: they don't exist. Every company has skeletons, quirks, and hidden risks. Your goal isn’t to find perfection; it's to achieve clarity. You are looking for a business whose imperfections you not only understand but are uniquely equipped to fix.
Turning Answers into Actionable Insights
By now, you’ve dug into everything from the quality of EBITDA to my real motivation for selling. The amount of information can feel overwhelming, so let’s boil it down to what truly matters for you.
- Financials are the Past, Not the Future: The P&L statements tell you where the business has been. Your job is to use that data to build a realistic model of where it can go under your leadership.
- People and Processes are the Engine: A business with a strong brand but a single linchpin employee (often me, the founder) is a huge risk for you. You must identify these dependencies and understand the systems. Is this a well-oiled machine you can step into, or an engine you’ll need to rebuild?
- Risk is a Price, Not a Stop Sign: Did you find a pending lawsuit or a major client about to leave? These aren't necessarily deal-breakers. They are negotiation points. Every risk has a price, and your job is to quantify it and factor it into your offer. A well-informed offer is one that accounts for the cost of fixing these known issues.
Ultimately, asking the right questions transforms you from a hopeful buyer into a savvy investor. You move from emotional attachment to objective analysis. This shift is critical. It’s what separates a successful acquisition from a cautionary tale.
Your Path Forward: From Due Diligence to Deal
The path from here is about building a bridge from your new knowledge to a confident offer. You're no longer just buying a business; you're buying a specific set of assets, liabilities, and opportunities. You see the company for what it is, not just the polished version I presented.
This detailed due diligence gives you leverage. It gives you confidence. Most importantly, it gives you a plan. You know what needs fixing on day one and where the low-hanging fruit for growth is. You can now walk into negotiations with a clear-eyed view, ready to make an offer you can stand behind, fully aware of the challenges and excited by the potential. This is how you buy a business without buying a world of unforeseen problems.
The journey of acquiring and growing a business can feel isolating, but you don't have to go it alone. At Chicago Brandstarters, we are a community of kind, hardworking founders and operators who share these exact war stories and help each other navigate the complexities of building something meaningful. If you're looking for peer support from people who get it, you know where to find us. Chicago Brandstarters