What should I check before buying a small business?
Before you buy a small business, verify the legal standing, three to five years of financials, how much the business depends on the owner or a few customers, and the lease and loan conditions that can quietly kill the deal. On The How of Business, host and serial entrepreneur Henry Lopez walks through his buyer due diligence checklist and the rule that runs through all of it: trust, but verify. The seller isn't lying to you, but protecting you isn't their job.
Make due diligence a written condition, never a handshake
Henry's first rule has nothing to do with spreadsheets. Due diligence has to be written into your letter of intent or purchase agreement, with a defined period and the legal right to walk away. Never waive it, and never buy a business as is, the way you might buy a used car.
He reframes what the period is for. It has three possible outcomes: you confirm the deal, you renegotiate the price or terms based on what you found, or you walk. All three are wins. Buyers who treat it as a formality skip straight to the first and miss the other two.
You also shouldn't do it alone. The host recommends a team of a business coach, a CPA, and an attorney working together, each looking at the parts they're trained to see.
Buy verified profits, not revenue
A business that's always busy isn't necessarily healthy. Henry's point is that you're not buying sales. You're buying verified profit and the assets that produce it. That means valuing the business on seller's discretionary earnings, which is the true cash the owner takes out once you add back their salary, perks, and one-time expenses, rather than on top-line revenue.
He shares the typical valuation range for small businesses, roughly one to three times SDE, and gives two warnings. Don't buy an unprofitable business on the promise you'll fix it. And don't buy an owner-dependent one where every relationship and decision lives in the seller's head, because you may just be buying yourself a lower-paying job.
He also explains why most small business deals are structured as asset purchases rather than stock purchases: you take the assets and leave the unknown liabilities behind, which is safer for the buyer.
The legal and financial checks that surface hidden risk
On the legal side, Henry says to confirm the business is in good standing, that the person selling actually has the right to sell, and to read the lease carefully. Lease traps, like a landlord who won't assign the lease or a term that ends in six months, can quietly kill a deal or leave you without a location.
On the financial side, request three to five years of statements and reconcile them against the real flow of cash, bank deposits, and tax returns. Unexplained errors or gaps between what the books say and what the bank shows are red flags, not rounding issues. Demand complete access. A seller who limits what you can see is telling you something.
Operational questions the numbers won't answer
The third area is operations. Who owns the systems and software, and do they transfer? How concentrated is the customer base, and would losing one account sink the business? Which employees are key, and will they stay after the sale? Are any workers misclassified as contractors, which becomes your liability the day you close?
Then come market and risk factors: insurance coverage, regulatory triggers that a change of ownership might set off, SBA loan conditions if you're financing that way, and franchise approvals if it's a franchised unit. Each of these can add weeks or block the sale entirely, so surface them early.
Henry's closing advice is to slow down. The only deal worth doing is the one you clearly understand.
"A no that you discover in due diligence is far cheaper than a yes you regret."
What to remember
- Write due diligence into the LOI or purchase agreement with a set period and the right to walk away. Never buy as is.
- Value the business on seller's discretionary earnings, typically one to three times, not on revenue.
- Avoid unprofitable or owner-dependent businesses; you may just be buying a lower-paying job.
- Verify legal standing, the right to sell, and the lease, then reconcile three to five years of financials against real cash flow.
- Check customer concentration, key employees, worker classification, insurance, SBA conditions, and franchise approvals before closing.
People also ask
How many years of financials should I ask for when buying a business?
Henry recommends three to five years of financial statements, reconciled against bank records and tax returns. Unexplained discrepancies should be treated as red flags.
What is a typical multiple for a small business?
The episode cites a typical range of one to three times seller's discretionary earnings, depending on the business, its risk, and how dependent it is on the owner.
Should I do an asset purchase or a stock purchase?
Most small business deals are asset purchases, and Henry explains that's generally safer for the buyer because you acquire the assets without inheriting unknown liabilities.
Based on Episode 618 of The How of Business, "Buyer Due Diligence," released August 17, 2026 and hosted by Henry Lopez.
