How to buy an existing business: what you inherit and what to verify
Short answer
Buying an existing business means taking over an operating history: customers, staff, a location, suppliers, systems and, crucially, records you can check. Start by verifying that history (three years of tax returns, monthly financials and bank statements), then the things that let it continue under you: the lease, key staff, customer relationships, licences and contracts.
An established business is easier to finance than a startup because lenders can underwrite its past cash flow, but you also inherit its problems, so diligence is the price of that advantage.
The big difference between buying an established business and starting one is evidence. A startup has a plan; an existing business has a record. Your whole approach should be built around testing that record and then making sure it continues once the seller hands you the keys.
What you inherit
The good
Revenue from day one, customers who know the name, trained staff, suppliers with terms, a working location, systems that run, and records a lender can underwrite.
The baggage
A lease you didn't negotiate, equipment someone else maintained (or didn't), staff habits, customer expectations, reputation online, and in a stock deal, every past liability.
Verify the history first
- Tax returns, three years. The baseline lenders use, verified against IRS transcripts.
- Monthly P&Ls and balance sheets for the same period plus year to date, to see trend and seasonality. See TTM.
- Bank statements to confirm revenue arrived. See proof of cash.
- The add-backs that turn profit into SDE, each with a document. See SDE.
Questions about what you'll inherit
- Which staff are essential, and what do they earn compared with the market?
- What equipment needs replacing in the next two years?
- What does the business's online reputation look like, and has it changed?
- What customer promises (warranties, prepaid services, gift cards) are outstanding?
- What informal arrangements exist with suppliers, customers or staff that aren't in writing?
Then check whether it continues without the seller
- Lease: term, options, assignment, rent increases. See lease assignment.
- Key staff: who the business depends on, and whether they'll stay. See keeping key employees.
- Customers: concentration and whether relationships are with the seller personally.
- Licences and permits: which transfer and which you must apply for.
- Contracts: customer, supplier and franchise agreements that need consent to assign.
- The seller's knowledge: a written transition plan. See seller transition.
Worked example: what three years of history tells you
Illustrative example, not a real business
A business shows revenue of $1.10 million, $1.18 million and $1.25 million over three years, and SDE of $210,000, $225,000 and $260,000. Looks like steady growth. Monthly P&Ls show the jump in the last year came in the final quarter, when one customer placed a large one-off order worth $70,000 of revenue. Bank deposits confirm the order was paid. Take it out, and last year's revenue is $1.18 million, the same as the year before, and SDE (at the business's margin on that order) is closer to $230,000. The trend is flat, not rising. Nothing in this is dishonest; the seller just presented the best year. The history is what lets you see it, which is the main advantage of buying an existing business. Use it.
Red flags in an operating history
- A strong final year built on one customer, one project or one price increase.
- Revenue up but deposits flat, or receivables growing faster than sales.
- Margins that improved because maintenance, marketing or staff were cut before the sale.
- Tax returns that differ from the P&L without a clear reconciliation.
- Online reviews that changed tone in the last year.
Why lenders like existing businesses
Lenders can underwrite historical cash flow. Under SBA SOP 50 10 8.1, a change-of-ownership loan is based on the last fiscal year or an average of the last two, not on projections, which can be reviewed but can't be relied on to meet the coverage requirement. That's an advantage over a startup, as long as the history holds up when the lender verifies it.
Questions to ask about the operating history
- What changed in each of the last three years: prices, staff, customers, location, suppliers?
- What were the best and worst months, and why?
- Which customers left in the last two years, and why?
- What did you spend on equipment, repairs and marketing each year, and is anything overdue?
- What would you have done next if you weren't selling?
- What surprised you most in your first year of owning it?
Asset or stock?
Most buyers of existing small businesses buy the assets, leaving most liabilities with the seller's entity. When contracts or licences can only stay with the entity, a stock purchase may be necessary, with heavier diligence. See asset vs stock purchase. For the full process, read how to buy a business.
Buying an existing business: the one-page checklist
The whole process of buying an existing business fits on one page: decide what you're looking for and how you'll pay, screen listings, review basic financials, make a non-binding offer (LOI), run due diligence starting with whether the earnings are real, secure financing, negotiate the purchase agreement, close, and then manage the handover and first 90 days. Each step below links to a fuller guide.
Print this page or copy it into your notes. It's the whole purchase on one screen.
1. Before you search
- Criteria: industry, size, location, your role. See how to buy a business.
- Funds for equity and closing costs. See equity injection.
- Talk to a lender early about what they'll finance.
2. Screening
- Read listings critically. See reading a listing.
- Sign NDA, get the CIM and summary financials.
- Ask the first questions. See questions to ask.
3. Offer
- Non-binding LOI with price, structure, exclusivity, conditions. See LOI.
4. Verify
- Proof of cash, tax returns, add-backs.
- Customers, lease, licences, staff.
- Full due diligence checklist.
5. Finance and sign
- Loan approval, lender valuation, any required reports.
- Purchase agreement, reps and warranties, non-compete, transition terms.
6. Close and hand over
- Closing checklist and funds. See closing.
- Seller transition and the first 90 days.
Your first conversation with the seller
The first meeting is not for negotiating. It is for learning how the business really works and whether you can trust what you are told. Topics that tend to give the most useful answers:
- Why they are selling now, and what they plan to do next.
- What a normal week looks like for them, hour by hour.
- The last three things that went wrong, and how they were fixed.
- Which employees customers ask for by name.
- What they would change if they were staying another five years.
- How long they are willing to help after closing, and in what form.
Write up your notes the same day and compare them with the documents later. Where the story and the records disagree is where diligence should start.
Existing business or a start-up?
The trade-off is simple to state. A start-up costs less up front but has no history to lend against and no customers on day one. An existing business costs more, but comes with revenue, staff, systems and a track record a lender can underwrite. The risk shifts from "will anyone buy this?" to "is what I've been told true, and will it last without the seller?". The rest of this guide is about answering that second question.
Frequently asked questions
Is it better to buy an existing business or start one?
Buying gets you immediate revenue, customers and staff, and is easier to finance, but you pay for goodwill and inherit problems. Starting is cheaper upfront but riskier and slower to cash flow. See should I buy a business.
What should I check first when buying an established business?
That the earnings are real (tax returns vs P&L vs bank deposits), then whether the business can continue without the seller: lease, staff, customers, licences.
Can I get an SBA loan to buy an existing business?
Yes, SBA 7(a) loans are widely used for changes of ownership, with at least 10% equity, a lender-ordered valuation and debt service coverage of at least 1.25 for an initial acquisition.
Do I take on the seller's debts?
Not in a typical asset purchase, where the seller pays off debts at closing. In a stock purchase, the company's liabilities come with it.
How long does buying an existing business take?
It varies widely. From LOI to closing often takes a few months for a lender-financed deal, longer if records are poor or third parties (landlord, franchisor, regulators) must approve.
What's the most important step?
Confirming the earnings are real before you spend heavily on lawyers and lender fees. See proof of cash and add-backs.
Sources
Related guides
General information, not legal, tax, financial or investment advice. Rules and lender practices change; check the linked sources and talk to your attorney, CPA and lender about your deal. Examples with named numbers are illustrations, not real businesses. OKtoBuy's Deal Check does not value businesses or give price opinions.