Before You Sign: What to Check on a Business You're Buying

Quick answer: Before you buy an existing business, the SBA says to review the full landscape: ask about contracts, leases, existing cash flow and inventory, then look into licenses and permits, zoning, environmental concerns if real property is included, and the value of the business. It also says that at this stage you’ll probably want professional help, and to consider hiring an attorney and an accountant. In Illinois, add the CBS-1 bulk sale notice to that list.

Here’s my take as a business lawyer: buying can be a great way to boss up. The SBA says the largest advantage is having an existing blueprint, which can include an established customer base, defined operating expenses and fully trained employees. But the blueprint comes with whatever else the seller built, and that’s what this list is for.

What should you ask about contracts and leases?

Start here, because this is where the business’s promises live. Ask to see every contract the business runs on: customers, vendors, equipment, employees. Then ask the question that matters most: what happens to each one when the owner changes?

The answer lives in the document itself, so someone has to read it. Likewise the lease. Commercial leases aren’t regulated nearly as much as residential leases, and you only have the rights the lease gives you. If the location is the reason this business works, the lease may be the most important document in the deal.

A contract is like a calculator: without the right input, you won’t get the right outcome. That goes for the ones you’re inheriting and the business contracts you’ll sign going forward.

What should you look at in the money?

The SBA tells buyers to ask about existing cash flow and inventory, and to review financial statements and tax returns. That’s accountant territory, and the SBA says an accountant can help you determine the full costs of purchasing and operating the business and even help estimate potential profit.

Before any of that, the SBA has a simpler first step: decide how much you’re willing to spend to purchase and ultimately manage the business. The price tag is not the whole number. If you’re borrowing, see using an SBA 7(a) loan to buy a business.

How is a small business valued?

The SBA says there are many methods to determine a fair price. It names these:

Method	What it does, per the SBA
Capitalized earning approach	Looks at the return on the investment the investor expects
Excess earning method	Like capitalized earning, but separates return on assets from other earnings
Cash flow method	Typically used to determine how much of a loan the business’s cash flow can support
Tangible assets (balance sheet) method	Values the business by its tangible assets
Value of specific intangible assets method	Compares buying a wanted intangible asset versus creating it

Pay attention to the last one. A lot of what you’re paying for might be intangible: the name, the customers, the reputation. Which leads to whether the brand actually comes with the business, and how the purchase price gets divided up for tax purposes.

What about licenses, permits and zoning?

The SBA is direct: you’ll need to get any needed licenses and permits from the current owner or apply for them yourself. Find out which federal, state and local permits and licenses you’ll need to run the business. Don’t assume the seller’s paperwork becomes yours because you bought the sign on the door.

Zoning requirements may affect the business as well, and the SBA says to make sure it follows the basic zoning laws in your area. If you plan to do anything different than the seller did, check that too.

If you’re buying real property along with the business, the SBA says it’s important to check the environmental regulations in the area.

What documents will you actually work through?

Once you’ve found the business, the SBA calls for a thorough, objective investigation. In short, do your due diligence. An attorney and an accountant together can help you create and evaluate:

• Letter of intent
• Confidentiality agreement
• Contracts and leases
• Financial statements
• Tax returns
• Sales agreement
• Purchase price adjustment

Look at where that list starts. A letter of intent and a confidentiality agreement come before the sales agreement, which means you want your lawyer involved at the start, not just the day of closing. The best defensive steps happen before the money moves, and the defense is in the preparation. Keep your own copies of everything you review, in one place, because you’ll need those same documents again for your lender, your accountant and any state filing.

What Illinois step gets missed?

Illinois adds the bulk sale notice. When a transaction qualifies, the buyer must file Form CBS-1 at least 10 business days before the sale, or can be personally liable for what the seller owes the Department of Revenue, up to the reasonable value of the property acquired. Read up on that notice before you agree on a closing date, because the form needs a signed sales contract and the financing agreement to go with it.

Why talk to the Bosses’ Lawyer about this?

Because you’ve got one shot at reading this stuff before it’s yours. I’m a Chicago business attorney licensed in Illinois, and I help small business owners with the pieces a purchase runs on: contracts, leases, the right legal structure, trademarks and employees. I’ll explain it in plain language, and I’ll tell you what I’d want answered before you sign.

Start with my page on buying a small business in Illinois, then book a discovery call or call 866-217-3432.