What to Look Out for When Buying a Business: 7 Things Most People Miss

Thinking of buying an existing business? Smart move—if you do it right. Over 650,000 businesses change hands in the U.S. each year (IBBA, 2024), but many buyers end up blindsided by hidden risks.

From inflated valuations to customers vanishing after the sale, the wrong deal can drain your bank account and your sanity.

This guide walks you through what to look out for when buying a business—especially the stuff most buyers forget to check.

If you’re planning to invest real money, you better know what’s behind the curtain. Ready to dodge those costly mistakes? Let’s get into it.

Why Buying an Existing Business Isn’t Always Safer?

Buying an existing business or a new company might seem easier than starting one from scratch. But don’t be fooled — it comes with hidden risks that many new business owners miss. You need to know what to look out for when buying a business before signing anything.

Here’s why it can go wrong:

• The current owner may not share full financial statements or tax returns.
• The business entity might have legal issues or be in poor standing with the state.
• You could inherit poor business operations, unpaid debts, or inactive licenses.
• The customer base may not stay loyal once the business owner leaves.
• The asking purchase price may be much higher than the company’s real value.

Pro tip: Always do full due diligence with a trusted advisor. Ask to see organizational documents, check for any legal liabilities, and talk to existing employees.

7 Things to Watch Out for When Buying a Business

1. Incomplete or Manipulated Financial Statements

Always ask for the financial statements and accounts receivable — and then double-check them. Sellers may hide debts or boost sales numbers to make their business look more profitable than it really is.

Here’s what you should do:

• Request balance sheets, income statements, and cash flow reports for the last 3 years.
• Compare these documents to official tax returns. If numbers don’t match, that’s a red flag.
• Look at net income trends. Is the business stable or just lucky one year?
• If you’re not a numbers person, hire a professional to review everything.
• Make sure all business assets—like equipment, inventory, and digital tools—are clearly listed in the deal.

Pro Tip: Even one missing year of records or a lack of due diligence can cost you more money later. Better to catch it now than regret it after the deal is signed.

2. Hidden Legal Liabilities

Always ask for the financial statements — and then double-check them. Sellers may hide debts or boost sales numbers to make their business look more profitable than it really is.

Here’s what you should do:

• Request balance sheets, income statements, and cash flow reports for the last 3 years.
• Compare these documents to official tax returns. If numbers don’t match, that’s a red flag.
• Look at net income trends. Is the business stable or just lucky one year?
• If you’re not a numbers person, hire a professional to review everything.

Pro Tip: Even one missing year of records or weird expenses can cost you more money later. Better to catch it now than regret it after the deal is signed.

3. Weak or Inflated Business Valuation

One of the biggest traps buyers fall into is overpaying for an existing business. Sellers often set a purchase price based on what they think the business is worth—not what it’s actually worth, which might not reflect a fair price .

Here's what you should do:

• Ask for a recent independent business valuation or hire a business valuation professional.
• Compare it to comparable businesses in the same industry or region.
• Look into the business’s balance sheet, net income, and cash flow to understand the actual health of the company.
• Check for intangible assets like brand recognition or intellectual property, but make sure they’re valued fairly.

Example: A buyer once paid top dollar for a local small business salon because of its great Instagram following. Turns out, most followers were bots—and actual sales were dropping. Always check real numbers, not just social hype.

Pro Tip: A good business broker can help you uncover hidden red flags and negotiate a better purchase price.

4. Disappearing Customers After the Sale

Customers are loyal—but usually to the business owner, not the business. When the owner leaves, the customers might leave too.

Before you buy:

• Review customer lists, past sales records, and active contracts (if any).
• Look at repeat buyer data to judge customer base loyalty.
• Ask how many of the customers are personal contacts of the current owner.
• Research the company’s reputation online through reviews and feedback.
• Understand what kind of marketing strategies or offers were used to keep customers coming back.

Real Story: One man bought a cleaning company, only to find out that 80% of the jobs came from the owner's friends. Within 6 months, the customer base dropped by half.

5. Dependence on the Current Owner

Many small businesses depend heavily on the business owner. That’s fine—until they leave. If the current owner runs the sales, marketing, and customer relationships, the whole business operation may collapse without them, leaving the new business owner at a disadvantage .

Before you buy, ask:

• Does the current owner handle all major decisions?
• Are any key customers or vendors loyal only to them?
• Do they have personal relationships that won’t transfer to you?
• Is there a transition plan or will you be left alone on day one?

Tip: Try to negotiate an agreement where the person selling the business stays on for at least 30–90 days to help with hiring employees during the handover. It makes a business acquisition smoother and gives you time to learn.

6. Employee Turnover or Disengagement

The existing employees are just as important as the business itself. If they’re planning to leave—or if they don’t trust the new owner or the existing customers lose faith —you’re in trouble.

Watch for these signs:

• High turnover in the last year
• Low team morale or vague answers during casual staff chats
• No written organizational chart or defined roles
• Missing organizational documents like contracts, job descriptions, or HR policies

What to ask:

• Will you retain the current team after the business acquisition?
• Are there key employees whose departure could hurt cash flow or customer relationships?
• Is the team trained on critical systems, or does only one person know how everything works?

7. Financing Terms That Favor the Seller

When buying an existing business, how you pay matters just as much as what you pay. Many sellers offer “easy” seller financing, but the terms might not actually work in your favor.

Here’s what to look out for:

• Are the interest rates higher than traditional bank loans?
• Is there a large balloon payment due later?
• Are there penalties if your cash flow dips or you miss a deadline?
• Does the sales agreement protect both sides, or just the person selling?
• A traditional business loan may be a safer financing path than rushed seller terms.

Quick Tip: Ask for the full payment schedule in writing. Then compare it with options like SBA loans or using your own cash. Sometimes, outside financing may offer better flexibility and lower risk.

The Role of the Business Owner During and After the Transition

The business owner plays a big role in helping the new owner take over smoothly. If you're buying an existing business, don’t ignore what happens during and after the handover, especially regarding the existing cash flow . Here’s what to look out for when buying a business.

During the Transition

• The current owner should stay on for a short time (usually 30 to 90 days).
• Ask them to walk you through daily business operations, customer handling, and supplier contacts.
• They should help train you, introduce you to existing employees, and show how tools and systems work.
• Get access to key files, organizational documents, and important contacts.

Tip: Include these tasks in the sales agreement. That way, you’re protected if promises aren’t kept.

After the Transition

• Check in with the former owner if something isn’t clear—but don’t rely on them forever.
• Start building your own customer base and team trust.
• Be ready to take over fully, from managing cash flow to making decisions.
• If problems come up, stay calm and stick to the plan you made during due diligence.

Real Example: A new owner who stayed in touch with the person selling avoided major tech issues by calling for advice—saving time and more money.

How to Check the Business Entity Structure Before You Sign

1. Ask: What Type of Business Entity Am I Buying?

This is the first thing you should ask the current owner. Are you buying a sole proprietorship, an LLC, a partnership, or a corporation?

Each type:

• Comes with different legal liabilities
• Affects how you report tax returns
• Determines what happens to assets and debts

Example: If you're buying a sole proprietorship, you're usually taking on all the risk. But with a corporation, that risk is limited to the business’s assets.

2. Request the Business’s Organizational Documents

Ask for all official organizational documents before you agree to the sales agreement.

Look for:

• The business registration certificate
• Articles of incorporation or formation
• Any partnership agreements or shareholder terms
• An updated organizational chart (shows who runs what)

These documents show if the business operations are legal and properly set up.

3. Confirm the Entity Is in Good Standing

A business might look fine on the outside but be in trouble legally.

Here’s how to check:

• Use the Secretary of State’s website to confirm the business is in good standing
• Make sure they’ve paid taxes and submitted required paperwork
• Ask for proof of business licenses and renewals
• See if there are any legal documents showing lawsuits or fines

Pro Tip: A quick online search can save you from buying a business that’s already sinking.

4. Review the Ownership Breakdown

Before you sign anything, ask: Who really owns this business? Some existing businesses have multiple partners, silent investors, or shareholders.

Here’s why this matters:

• You need to know who’s allowed to sell the business entity.
• You should see a full list of owners and how much each one owns.
• These details are often listed in organizational documents or the partnership agreement.

Quick Tip: If the business owner selling to you isn’t the sole owner, you’ll need approval or signatures from all owners or shareholders before the parties sign the final deal.

5. Look for Transferability Restrictions

Some business entities have zoning laws that stop ownership from being transferred easily. These are called transfer restrictions—and they could delay or block your deal.

What to check:

• Are there any clauses in the sales agreement that say the seller needs permission from other partners to transfer shares or control?
• Do licensing or legal documents restrict who can run the business?
• If it’s an LLC or corporation, review the organizational chart for any approval procedures.

Example: One buyer almost signed without knowing the seller needed board approval. That mistake would’ve cost him valuable time and nearly killed the deal.

6. Watch Out for Liability Risks

Finally, understand what environmental regulations and legal liabilities might come with the business entity. You’re not just buying the brand—you might inherit debts, lawsuits, or unpaid taxes.

Here’s what to do:

• Ask for all past and current legal documents and contracts.
• Check if any business's assets are being used as loan collateral.
• Have a legal pro confirm if liability stays with the seller or moves to the new owner.

Real Talk: One buyer inherited a pending labor lawsuit simply because the entity type transferred liabilities by default. Don’t let that be you.

7. Have a Legal Pro Review It

When thinking about what to look out for during the due diligence process when buying a business, don’t skip this step—have a legal expert go through everything.

Even if the business entity looks clean on paper, hidden issues can live inside the legal documents, sales agreement, or organizational documents.

A trained business attorney will help you:

• Spot liability risks you may have missed
• Confirm that the business's assets truly belong to the seller
• Check if parties signed all contracts and agreements properly
• Flag any clauses that affect ownership, taxes, or your rights as a new owner

Real Example: One buyer almost lost the purchase price deposit over a missing document that wasn’t disclosed. Their lawyer caught it just in time.

How to Evaluate the Customer Base Before You Commit

1. Concentration risk

This means too much of the revenue comes from just a few customers.  If even one big customer leaves, the existing business could collapse.

How to spot it:

• Ask for sales data or financial statements.
• See if more than 25% of revenue comes from 1–2 customers.
• Ask: “What happens if these top buyers leave?”

Tip: Diversified customer base = less risk, more long-term value.

2. Churn rate

It’s the rate at which customers stop buying. High churn = unhappy or disinterested customers. That means you’ll need to spend more money just to stay even.

How to find it:

• Ask the business owner for customer retention numbers.
• Compare the number of new customers vs. those lost every month.
• Check reviews, complaints, or refund requests.

Pro Tip: A churn rate above 10–15% is a red flag for most small businesses.

3. Customer lists

What to ask for:

• A clean, verified list of current and past customer lists.
• Details like purchase history, email status, and contact info.
• Segmented data by type (B2B, B2C, location, loyalty level, etc.)

If the customer list is old, unverified, or unusable, you lose one of the business’s assets you’re paying for.

How to review it:

• Check if customers are real, reachable, and active.
• Ask how the data was collected and how often it’s updated.

Warning: No verified list? That’s a major risk when buying an existing business.

4. Brand loyalty

Brand loyalty means customers trust and stick with the existing business, even when new options pop up.

When buying an existing business, a loyal customer base is like gold. If customers love the brand, they’ll likely stay—even after ownership changes.

How to check it:

• Look at how many repeat buyers the business owner has.
• An established brand might look strong online, but test how deep that loyalty really runs. Read online reviews and testimonials. Are customers excited or annoyed?
• Check for loyalty programs, subscriptions, or repeat order rates.
• Ask the current owner if key customers have been with the brand for years.

Tip: A strong brand recognition and loyal following can lower churn and give you a head start as the new owner.

5. Engagement insights

Engagement shows how active and interested the customer base really is. It’s not just about who buys—but who clicks, replies, and talks. Engagement

High engagement means the business is healthy. Low engagement? You might need to spend more money on marketing strategies to wake it up.

How to check it:

• Ask for email open rates and click-through rates.
• Look at social media comments, likes, and shares.
• Review CRM or newsletter performance—are people opening and acting?
• Ask if the customer lists are active or outdated.

Warning: If the business has a big list but no one responds, that’s a red flag.

Conclusion

Buying a business and its tangible assets is a big deal, and there’s a lot that can go wrong if you miss the details. From checking financial statements to digging into legal documents, the smart move is doing your due diligence early. Always ask the tough questions about business operations, the business entity, the risks involved and the current business owner. If you’re serious about what to look out for when buying a business, take your time and work with a legal or financial pro. It’s your money—protect it.

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