Considerations when buying a small business
Buying an existing business can be a faster path to ownership than starting from scratch. You get customers, cash flow, employees, and a track record on day one. But that head start generally comes with a cost, and sometimes some baggage. Buyers remorse can be very real; it’s not always as simple as portrayed in social media.
Here are a few things potential buyers should be thinking about before they sign anything.
1. Asset Purchase or Stock Purchase?
This is one of the first decisions you'll make, and it shapes almost everything else in the deal.
Asset purchase: You buy the business's assets (equipment, inventory, contracts, goodwill) rather than the entity itself. Buyers generally prefer this structure because it lets you leave unwanted liabilities behind and often provides better tax treatment through a stepped-up basis in the assets.
Stock (or membership interest) purchase: You buy the entity itself — the corporation or LLC — along with everything attached to it, including liabilities you may not know about yet. Sellers often prefer this structure, particularly for tax reasons.
There are some hybrid models and mix elements of both. But these are the basic structures.
The right structure for each buyer will depend on the type of business, its liabilities, contracts that may or may not be assignable, and tax consequences for both sides. This is usually where a deal starts to get negotiated in earnest.
2. Due Diligence — Beyond the Financials
Most people know to look at the tax returns and profit-and-loss statements. That's necessary but not sufficient. A thorough due diligence process should also cover:
Contracts: leases, customer agreements, vendor agreements, and whether they can be assigned to a new owner without triggering a default or renegotiation
Employees: employment agreements, non-competes, benefits obligations, and whether key employees are likely to stay
Licenses and permits: many are non-transferable and need to be reapplied for under the new owner
Litigation history: pending, threatened, or recently settled disputes
Intellectual property: who actually owns the trademarks, domain names, or proprietary processes the business relies on
Corporate records: whether the entity has been properly maintained (minutes, resolutions, cap table accuracy)
Sloppy corporate records or missing documentation aren't automatically deal-killers, but they're a signal to slow down and look closer.
3. Valuation Isn't Just a Multiple of Earnings
Small business valuations often get reduced to a multiple of revenue, EBITDA, SDE, or something similar. Those shortcuts can be a useful starting point, but they don't account for concentration risk (is 60% of revenue coming from one customer?), owner dependency (does the business run without the current owner, or is the owner the business?), or the state of the industry the business operates in. And that assumes the number being presented is actually right.
A number of professionals specialize in this area and can be invaluable in helping a buyer understand the true numbers and valuation of a potential person. This can help buyers avoid costly mistakes and overlook important financial matters. Because a small business finances are often much more complicated than presented by a hopeful seller. A buyer should understand the numbers and what's actually driving them before moving forward.
4. How the Deal Is Financed Affects the Terms
Whether you're paying cash, using SBA financing, or negotiating seller financing changes the shape of the deal:
SBA lenders typically require specific representations, seller notes on standby, and their own due diligence timeline
Seller financing can align incentives — a seller who's owed money is motivated to help the transition succeed — but it also means continued financial entanglement with the seller after closing
Earnouts, where part of the purchase price depends on future performance, can bridge a valuation gap between buyer and seller, but they need to be drafted carefully to avoid disputes over what counts toward the target
5. What Happens the Day After Closing
A surprising number of deals focus so heavily on getting to closing that no one plans for what happens the next morning. Buyers should think through:
Transition period: will the seller stay on for a set period to help transfer relationships and institutional knowledge?
Non-compete and non-solicitation agreements: is the seller restricted from opening a competing business down the street or poaching employees and customers?
Employee retention: are key employees staying, and have they been told what to expect?
Vendor and customer relationships: do contracts need formal notice of assignment, and will key relationships transfer smoothly?
6. Tax Structure Matters to Both Sides
In an asset purchase, purchase price allocation — how the price is divided among assets like equipment, inventory, goodwill, and non-compete agreements — has real tax consequences for both buyer and seller, and their interests often don't align. Buyers generally want more of the price allocated to assets that depreciate quickly; sellers often prefer allocations that produce more favorable capital gains treatment. This should be contemplated and negotiated as part of the deal, not an afterthought filled in on a form later.
7. Get the Right People Involved Early
The most common mistake buyers make isn't a bad decision — it's bringing in legal, tax, and valuation advice too late, after the major terms are already agreed to informally. By the time a letter of intent is signed, many of the structural decisions that determine deal quality have already been made. Involving an attorney, tax advisor, and/or valuation expert during the negotiation phase, not just at closing, gives you room to actually shape the deal rather than just paper it.
This post is intended for general informational purposes and does not constitute legal or tax advice. Every transaction is different, and the right structure depends on the specific facts involved. If you're considering buying a business, Dean Business & Tax Law can help you evaluate the deal and structure it properly from the start.