Questions to ask when buying a business: twenty that actually matter

The questions to ask when buying a business fall into five groups: why the owner is selling, whether the profit is real, what you would be taking on, who the people are, and what you would actually own on completion. Ask them in that order. A weak answer early on tells you whether the later, more detailed questions are worth the time and the professional fees.

A seller's information pack, by contrast, is written to show the business at its best. That is not dishonest; it is simply not your side of the conversation. The questions below are the buyer's side.

Why is the business being sold

Start here. The answer shapes how you read everything that follows.

• Why are you selling, and why now?
• What would you do differently if you were staying another five years?
• Have you tried to sell before, and if so, why did it not complete?
• Who else has looked at this, and how far did they get?

Retirement, ill health, a partner dispute or a desire to do something else are all ordinary reasons and do not themselves say anything bad about the business. A vague answer, or one that changes between conversations, is the signal to slow down, not the specific reason given.

Is the profit real

Every other number depends on this one.

• Can I see three years of filed accounts and the management accounts since the last year end?
• Can I see the bank statements for the same period?
• What has been added back to profit, and what evidence sits behind each add-back?
• Is anything in the last year unusual: a one-off contract, a grant, a price rise that has not yet annoyed customers, a cost that was deferred?

Our due diligence checklist for a first acquisition sets out how to test each of these against evidence rather than against the seller's word. If the figure you are being offered is seller's discretionary earnings or an adjusted EBITDA, ask exactly what was added back; our explainer on SDE versus EBITDA covers why the two are not interchangeable and how mixing them up makes a business look cheaper than it is.

Will the business still work once you own it

A healthy set of accounts can still describe a business that depends entirely on the person selling it.

• How much revenue comes from the largest customer, and from the five largest together?
• What is in writing with the biggest customers: contract length, notice period, and any clause that lets them leave if ownership changes?
• Where does new work come from, and would it still arrive if you changed nothing else about how the business is run?
• What would stop working in the first month if the current owner were not there?

Illustration, not a real business: a seller tells you the top customer is "a big chunk" of revenue. You ask for the number and it turns out to be 42% of last year's sales, on a rolling contract with a 30-day notice period. That single fact changes the deal more than almost anything in the accounts, because it tells you how much of the price you are paying for one relationship you do not control.

What would you be taking on

This is where the legal structure of the deal matters.

• Is this being sold as a share purchase or an asset purchase, and why has the seller proposed that structure?
• What debts, leases, finance agreements and guarantees does the business currently carry?
• Is there any dispute, claim, or threatened claim, current or past?
• Are tax returns filed and paid, and is there anything open with the tax authority?

In a share purchase you buy the company itself, with its full history, including liabilities you were not told about. In an asset purchase you buy chosen assets and the trade, and leave most of the history with the seller's company. Our guide to asset purchase versus share purchase covers the difference in full; which one you are doing should change how hard you push on this section.

If you are buying in the United States and the deal is structured as an asset sale, ask how the purchase price will be allocated across the asset classes. Both sides are generally required to report that allocation to the Internal Revenue Service on Form 8594, and a mismatch between the buyer's and seller's figures can draw attention from the IRS; the current form and instructions are on IRS.gov. Tax rules change, so check the current guidance before you rely on this.

If the target is a UK company, you can check a surprising amount yourself, for free, before you ever ask the seller a question. The Companies House register, reached through GOV.UK, shows company status, filing history, current and resigned directors, mortgage charges and insolvency history at no cost. A pattern of overdue filings, a recently resigned director, or a charge registered against the company that nobody has mentioned are all worth raising before you go further.

Who are the people

A small business is, in practice, its staff.

• Can I see a list of employees with role, pay, start date and notice period?
• Who holds the knowledge that is not written down anywhere, and what happens if that person leaves?
• Are there subcontractors, and are they genuinely self-employed or employees in substance?
• What do staff actually know about the sale, and when will they be told?

If the business is in the UK and is sold as a going concern, the Transfer of Undertakings (Protection of Employment) Regulations, usually shortened to TUPE, generally carry existing employees across to the buyer on their existing terms, with continuity of service preserved and consultation obligations on both the outgoing and incoming employer. The government's own guide sets out how this works in detail: TUPE: a guide to the 2006 regulations, GOV.UK. Whether TUPE applies to a particular deal can be a genuinely difficult question, so take legal advice early rather than assuming either way. Equivalent protections exist in other jurisdictions under different names and different tests; ask a local employment adviser rather than assuming the UK position travels.

What would you actually own on completion

Sellers sometimes assume ownership of things that, on paper, belong to someone else.

• Is the premises leased or owned, and if leased, how long is left and does the landlord's consent matter?
• Is the equipment owned outright or on finance?
• Who legally owns the business name, the website, the phone numbers, the social media accounts and the customer list?
• Which licences, accreditations and insurance policies does the business hold, and do they transfer to a new owner or need re-applying for?

It is more common than buyers expect for a website domain, a key software account or even the trading name to be registered to the owner personally rather than to the company. Ask to see the registration, not just a description of who holds it.

What to do with the answers

None of this is a pass or fail test on its own. Treat every weak answer as one of three things: a reason to reduce the price, a reason to hold part of the price back until a condition is met, or a reason to walk away. Put the answers in writing as you go, even informally, so that what you were told before you paid for proper due diligence is not quietly forgotten once you are emotionally committed to the deal.

Bring in an accountant to test the financial answers and a solicitor to test the legal ones before you commit to anything. Go to them with your own list of what concerns you, in order, rather than asking them to start from nothing; it is cheaper and it gets to the real risks faster. It also helps to put the deal in front of people who have bought a business before and have no stake in whether you proceed. That is a large part of what the Republic of Investors community is for.

Common questions

How many questions should I actually ask before making an offer? Fewer than you might think, before an offer, and far more after. A short list focused on the seller's motive and the honesty of the profit figure is usually enough to decide whether to make an indicative offer at all. The detailed list, covering contracts, staff, assets and liabilities, belongs to formal due diligence once a price is agreed in principle.

What if the seller will not answer a question directly? Note it and move on to the next one rather than pressing immediately. A pattern of vague or shifting answers across several questions is far more informative than any single evasive answer, and it is a pattern you only see if you keep a written note of what was actually said.

Should I ask these questions before or after signing a non-disclosure agreement? Most sellers will want a non-disclosure agreement in place before sharing financial detail, customer names or staff lists, and that is a reasonable request to grant. The early, general questions about motive and headline numbers can usually happen before any paperwork is signed.

Do I need a lawyer for a small, simple-looking purchase? Yes, in nearly every case. "Simple-looking" is often how a business looks before you have asked about its leases, its contracts and its liabilities, and a solicitor experienced in business sales will usually find at least one issue worth raising, even in a straightforward deal.

Is it rude to ask about customer concentration or staff knowledge directly? No. A seller who has run a credible process expects these questions and will usually answer them more readily than a seller who has not thought about them. Asking plainly, and early, is a normal part of how these deals are done.