Due diligence when buying a small business

Business due diligence means checking, before you commit, what you are really buying: who has the right to sell it, which debts and obligations come with it, and whether its income stands up. For a small business it comes down to seven checks. Some use public records; others need the seller's documents or a local professional.

The seven checks

1. Who owns the business, and who can sign the sale
2. What exactly you are buying: the company, or its assets
3. Which debts and liens can follow the business
4. Whether the lease passes to you, and for how many years
5. Whether the licences pass to you, and whether trading must stop meanwhile
6. What happens to the staff
7. Whether the income stands up

Before you pay a deposit

Agree in writing what you will see and when; detailed records often follow a confidentiality agreement, which is normal. Before any deposit, confirm who the seller is and their authority to sell, and make the deposit refundable in writing until the checks below are done. Pay it into escrow or a lawyer's client account — at the very least into an account in the seller's legal name, never a personal one.

1. Who owns it, and who can sign

Get the seller's legal name, the trading name and any registration number, then search the register:

• UK: Companies House, free — directors, people with significant control, filed accounts, registered charges.
• US: the business registry of the state where the company is registered, usually the Secretary of State.
• Canada: Corporations Canada for federal companies, the provincial registry for the rest.
• Australia: ASIC for companies, ABN Lookup for sole traders and partnerships.

A register entry alone does not show who may sign the sale: the business, its assets and its shares can have different owners. Ask in writing in what capacity the person you deal with is selling — owner, shareholder, attorney, or broker with a written mandate.

2. The company, or its assets

3. Debts and liens that can follow the business

• Liens on equipment. Lenders record their claims on business assets:
  • in the US as UCC filings in the state where the seller is registered, usually with the Secretary of State (vehicle loans show on the title instead);
  • in Canada in the provincial personal property registry (in Quebec, the Register of Personal and Movable Real Rights);
  • in Australia on the PPSR;
  • in the UK, for companies, as charges at Companies House.

  Equipment pledged to a lender can stay pledged after you have paid for it.

• Sales tax. Several US states make the buyer liable for the seller's unpaid sales tax unless the buyer follows the state's procedure.
  • California: the buyer must hold back enough of the price to cover that tax until the state tax agency (CDTFA) issues a Certificate of Payment. The buyer can request it through CDTFA's tax and fee clearance; it can take 60 days or more. Without it, the buyer can be personally liable, up to the purchase price.
  • New York: when buying a business's assets, the buyer must file Form AU-196.10 with the Tax Department at least 10 days before paying or taking possession, whichever comes first.
  • Other states have their own rules; check the one where the business is.
• Judgments and insolvency.
  • UK: the Register of Judgments, Orders and Fines, and the Individual Insolvency Register (both England and Wales), and notices in The Gazette.
  • US: county court records and federal bankruptcy filings.

  Judgments and bankruptcies are on public record. Claims that have not reached judgment often are not, so ask for them in writing.

Ask for: a written list of all debts, liens and pending claims — and, where the state or country issues one, a tax clearance before the deposit stops being refundable.

4. The lease

For a shop, a restaurant or a workshop, the lease is often most of what you are paying for. Most commercial leases pass to a new tenant only with the landlord's consent. The landlord may ask for a new guarantee, references or its costs, may try to renegotiate the rent and, where the lease and local law allow, may refuse. In England and Wales, Ontario and some Australian states for retail leases, the law stops a landlord refusing without good reason.

Ask for: the full current lease with every amendment — not a summary — and the landlord's position on the transfer, in writing. Read the break clauses, rent reviews and repair obligations. Then two numbers: how many years remain, and what share of real takings the rent will be after the transfer. A price that is fair for ten years of lease is a different price for eighteen months.

5. Licences and permits

Some permits belong to the premises, some to the person, and some do not pass to a new owner at all. Alcohol is the clearest case:

• England and Wales: a premises licence moves to a new holder only through an application to the local council. If the current holder agrees, the transfer can take effect the day it is applied for, so trading need not stop.
• US: the state alcohol regulator must approve a new owner first. In some states, Texas for one, a licence cannot be transferred at all: the buyer applies for a new one.

Food, health and trade permits have their own rules. The practical question is not only whether a licence transfers, but whether the business must stop trading while it does — and for how long.

Ask for: the licences themselves, and confirmation from the issuing authority of what passes to a new owner and what must be applied for again.

6. The staff

• UK: if you buy the business itself (not only its equipment), the staff usually move to you automatically, keeping their contracts, start dates and rights — the TUPE rules; some pension rights are an exception. If you buy the company's shares, TUPE does not apply, because the employer stays the same; the staff, and any claims they have, stay with the company you now own.
• US: if you buy the assets, staff do not move to you automatically. The seller must pay final wages and any unused vacation pay that state law requires, and you choose whom to hire. A buyer who carries on the same business can sometimes be held liable for the seller's unpaid wages.
• Canada and Australia: a buyer need not keep the staff, but those it does keep usually bring their length of service with them.

Ask for: a staff list with start dates, contracts and pay, and a written statement of anything owed to anyone or claimed by anyone.

7. Whether the income stands up

Ask for three years of tax returns and financial statements, and this year's figures to date. For a café or a shop, add the till reports, card-terminal and delivery-platform statements, and payroll records.

Filed figures — tax returns, VAT or GST returns, accounts filed at the register — carry far more weight with a bank, a court or a tax office than a spreadsheet. Many small companies file no profit figures publicly, so ask for the returns themselves.

Then check:

• any costs the seller "adds back";
• what it would cost to replace the owner's own work;
• equipment that will soon need replacing;
• the cash needed to keep trading.

Where the figures disagree, ask the seller to explain each gap in writing.

Questions to ask when buying a business

1. Which company or person legally owns and operates the business, and what is its registration number?
2. In what capacity are you selling — owner, shareholder, attorney, or broker with a written mandate?
3. Am I buying the company's shares or its assets? Which contracts pass to me?
4. Is there any loan, lien or lease on the equipment? Could you list all debts and pending claims in writing?
5. May I see the full lease? Has the landlord agreed to the transfer, and how many years remain?
6. Which licences does the business run on, and which pass to a new owner without a new application?
7. How many people work here, since when, and is anything owed to any of them?
8. May I see the last three years of tax returns, and do they match the figures in the listing?
9. How many hours a week do you work here, and which of your tasks would I need to take over or pay for?
10. Which customers, suppliers or contracts matter most, and will they stay after the sale?
11. How do sales vary by month, and what explains the changes?
12. What equipment needs repair or replacement soon, and how much stock and cash will I need at handover?
13. Why are you selling, and how long has the business been on the market?
14. Can I see the premises during opening hours, in person or by video call?

A genuine seller can start an answer to every one of these, even if the honest answer is "the landlord hasn't replied yet". Note which answers come in writing, which come quickly, and which keep being postponed.

Red flags when buying a business

• Money is requested before you know who is selling, what exactly is for sale and where it is.
• Payment details point to a personal account, a money-transfer service or crypto — or change without explanation.
• You cannot see the premises during opening hours, in person or by video, before paying.
• The figures are not supported by any filed return or record.
• The lease is described but never shown.
• Documents promised by an agreed date keep not arriving.
• The same photos appear on another listing in another city — a reverse image search takes a minute.

None of these proves fraud on its own. Each is a reason to pause, ask for an explanation in writing and wait for the document.

Common questions

How long does due diligence take on a small business?
Mostly as long as the seller takes to produce documents. The public-record part can be done in a day or two; agree a written timetable for the rest when you make your offer.

Who pays for due diligence?
The buyer, as a rule: it is the buyer's protection.

Can I walk away after due diligence?
That depends on what you signed. Make your offer, and any deposit, conditional in writing on due diligence you are satisfied with.

What you can check yourself — and what takes paid work

The first layer is cheap and quick: the company register, a lien search, Street View of the address, a reverse image search of the photos. Our free browser extension works on listings on any site: it marks what a listing leaves out and drafts your questions to the seller.

What takes time is reading it all together: whether the company, the premises, the licence and the lease belong to the same business; which debts follow a business in that particular country; whether the seller's figures survive the seller's own filed documents. That work is usually split between a company credit report, a lawyer and an accountant.

If you want it done for you

We are Provenance Diligence. One report on one business for sale, starting from the listing, in any country whose records we can read.

• €550 — before you talk to the seller. From the public records: what exactly you are buying, which debts can follow the business, what is recorded on the lease and the licences, the documents to ask for and the questions to ask, in the language of the country. Within 24 hours on working days. We do not contact the seller.
• €950 — when you negotiate. All of the above, plus the seller's figures against the seller's own documents: where they disagree, by how much, and what to say about each gap. Within 48 hours on working days once the documents arrive.

Three things we look at that company reports and checklists usually leave out: how many years of lease the price buys, whether the business must stop trading while its licences change hands, and what to do if the seller refuses a document.

The report comes in the language you choose on the order form — any of 181 — with the same deadline.

It does not replace a local lawyer, an audit or a valuation; it tells you what to check and what to ask them. No payment now: we look first and tell you within 24 hours on working days whether we take it on. You pay only if we do.

Prices and what each report includes →

General information, not legal advice. Rules differ by country, state and contract; confirm how each point applies to your deal with a licensed professional where the business is.

Buying in Spain or Portugal? See 10 red flags before you buy a small business.