Buying a Business? Do Your Due Diligence!
Show Notes Page: https://www.thehowofbusiness.com/618-buyer-due-diligence/
Buyer due diligence is your primary protection when purchasing a small business, and on this episode Henry Lopez walks through a practical checklist to verify the financials, uncover hidden risks, and avoid overpaying for or buying the wrong business.
Get your FREE DOWNLOAD: Buyer Due Diligence Checklist – from the show notes page for this episode.
Buyer due diligence is the single most important protection you have when purchasing a small business. And skipping or rushing it is how buyers end up owning problems they never saw coming.
Buying an existing business can be one of the fastest paths to successful ownership. You inherit customers, cash flow, systems, and employees, ideally in a proven, profitable model. But things are not always as they appear. A business that's always busy or generating strong revenue isn't necessarily healthy, and you may be inheriting problems that aren't obvious at first glance. Due diligence is how you find those issues before closing, not after.
In this episode of The How of Business, Henry Lopez walks through his buyer due diligence checklist. This checklist includes the key areas you need to investigate, the mistakes that trip up first-time buyers, and how to make sure the business you're paying for is actually the business you think you're buying. Whether you're preparing to buy or getting ready to sell, this is the framework for looking under the covers with confidence.
Henry frames the whole process around an old proverb: trust but verify. A good seller isn't lying to you, but it isn't their job to protect you either. They'll naturally highlight what's great and will likely remain quiet on what's broken. Verification is your job, along with your team of advisors: a business coach, a CPA, and an attorney working together.
He explains why due diligence must be a written condition of your letter of intent or purchase agreement, giving you 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 also reframes the three possible outcomes of the due diligence period: 1) the deal is confirmed, 2) the price or terms get renegotiated, or 3) you walk away.
He covers deal structure (why most small business deals are asset purchases and why that's safer for the buyer), and how to validate earnings using seller's discretionary earnings rather than revenue. Because you're not buying sales, you're buying verified profits and the assets that produce them. He shares the typical one-to-three multiple range and warns against buying an unprofitable or owner-dependent business, where you may simply be buying yourself a lower-paying job.
Henry then explains the core investigation areas: legal (good standing, who actually has the right to sell, and the lease traps that can quietly kill a deal), financial (three to five years of statements, reconciling the real flow of cash, and treating unexplained errors as red flags), operational (systems ownership, owner and customer concentration, key-employee retention, and worker misclassification), plus market and risk factors like insurance, regulatory triggers, SBA loan conditions, and franchise approvals.
His closing reminder says it best: "A no that you discover in due diligence is far cheaper than a yes you regret." Slow down, demand complete access, and the deal you clearly understand is the only deal worth doing.
This episode is hosted by Henry Lopez. The How of Business podcast focuses on helping you start, run, grow and exit your small business. The How of Business is a top-rated podcast for small business owners and entrepreneurs. Find the best podcast, small business coaching, resources and trusted service partners for small business owners and entrepreneurs at our website https://TheHowOfBusiness.com
