Buying a going concern can skip the hardest part of starting up: finding customers. It also means inheriting decisions someone else made, some of which are invisible until month three. Due diligence is the process of making those decisions visible while you can still walk away.

Start with why it is for sale

Retirement, relocation, illness, a change in the market, a lease ending, a partner dispute. Some answers are ordinary and fine. Others point at a problem you are about to buy. Ask the question directly and in writing, then check whether the answer is consistent with the numbers.

Be cautious if the seller stays vague, if the business has changed hands repeatedly, or if the sale is urgent in a way that discourages questions. Urgency is a pressure tactic as often as a circumstance.

Verify the financial picture

Ask for three years of accounts and, more importantly, the bank statements that support them. Accounts can be prepared in ways that flatter a small business; bank statements are harder to shape. Reconcile revenue in the accounts against deposits in the bank, and look for unusual movements at year end.

Normalise the profit. Add back one-off costs, remove the seller's personal expenses, and adjust the owner's salary to what you would actually pay someone to do that work. Many small businesses look profitable only because the owner is unpaid and working sixty hours.

Look closely at customers

How many customers, how often do they buy, and how much comes from the largest few? A business with one customer providing a third of revenue is a business with a cliff edge. Ask for a customer list with revenue by customer over three years, and check whether relationships are contractual or merely habitual.

Where possible, speak to a handful of customers before completion. Their reasons for buying tell you what you are actually acquiring, and whether they would stay through a change of owner.

You are not buying last year's profit. You are buying the reasons customers will come back next year, and those reasons need evidence.

Read the contracts and liabilities

Lease, supplier agreements, employment contracts, customer agreements, finance agreements, insurance, licences and any outstanding disputes. Check which transfer automatically, which need consent, and which end on a change of ownership. A major customer contract that terminates on sale changes the value completely.

Ask specifically about debts, tax arrears, pending claims, warranty obligations and equipment finance. Get written confirmation that nothing material has been omitted, and have a lawyer review the warranties in the sale agreement.

Assess the operations and the people

Visit on a normal trading day, not a staged one. Watch how work flows, where the bottlenecks sit, and whether the seller is essential. If the business depends on the owner's relationships or knowledge, plan how that transfers, and put it in the handover agreement.

Talk to staff about their roles, tenure and concerns. High turnover, or a team that looks alarmed by the sale, is information. So is a team that runs the place without the owner, which is an asset you should pay for rather than accidentally destroy.

Price and structure the deal

Small businesses are often valued as a multiple of normalised profit, adjusted for assets, risk and growth. Whatever the method, the price should reflect what you have verified, not what was claimed.

Consider an earn-out or deferred element tied to performance after completion. It bridges the gap between the seller's optimism and your evidence, and keeps them motivated through the handover.

Due diligence checklist

  • Reason for sale confirmed in writing, and consistent with the numbers
  • Three years of accounts reconciled against bank statements
  • Profit normalised for owner pay and one-off items
  • Revenue by customer over three years reviewed
  • Key contracts checked for change-of-ownership clauses
  • Debts, tax position and pending claims confirmed
  • Lease terms and remaining term understood
  • Staff spoken to, and handover plan agreed
  • Price tied to verified figures, with part deferred where possible
  • Solicitor and accountant engaged before signing

Due diligence is slow and unglamorous. It is also the only part of the purchase where you still have leverage. Once the money has moved, every surprise becomes your problem to solve at your own expense.