Essential Questions to Ask Before Buying a Small Business

Buying a small business is a complex undertaking that requires more than reviewing financial statements. The questions you ask during due diligence determine whether you buy a thriving enterprise or inherit a bundle of problems. From verifying cash flow and assets to understanding customer relationships and legal obligations, thoughtful questions protect your investment and prepare you for ownership. Here are key areas to explore when evaluating a business, especially when financing with an SBA 7(a) loan.

Financial Questions

• How consistent is the cash flow? Request at least three years of financial statements, tax returns and year‑to‑date reports. Compare revenue trends, gross margins and operating expenses. Ask about seasonality and extraordinary events that may distort earnings.
  
• What are the normalizing adjustments? Many sellers add back owner salaries, one‑time expenses or discretionary spending to show higher earnings. Validate these add‑backs through bank statements and discuss them with your CPA. Consider commissioning a quality of earnings report to confirm the sustainability of earnings.
  
• What is the debt service coverage ratio? Calculate DSCR using net operating income divided by total debt payments. SBA lenders typically require projections showing DSCR of at least 1.15 by the second year, though most prefer 1.25 or higher.
  
• How much working capital is included in the sale? Ensure you’re receiving sufficient working capital to operate post‑closing. Ask for a schedule of current assets and liabilities and negotiate any shortfalls.
  

Operational Questions

• How reliant is the business on the owner? Determine whether the owner holds key customer relationships, performs critical functions or has specialized knowledge that isn’t documented. A business dependent on the seller may be hard to transition.
  
• What systems and processes are in place? Inquire about written procedures for operations, sales, marketing and finance. Well‑documented processes make transitions smoother and reduce operational risk.
  
• What capital expenditures are needed? Ask when major equipment, vehicles or technology will need replacement. Maintenance capital expenditures should be factored into your projections and negotiations.
  
• Are there pending contracts or projects? Review agreements with suppliers, customers and landlords. Identify any clauses that trigger upon change of ownership.
  

Employee and Customer Questions

• Who are the key employees? Understand their roles, tenure and compensation. Plan for retention or recruitment strategies. Discuss any non‑compete or non‑solicit agreements.
  
• How concentrated is customer revenue? A business reliant on a few clients is riskier. Request customer lists with revenue by account and evaluate churn rates.
  
• What is the competitive landscape? Assess market share, barriers to entry and potential threats from new competitors or changes in regulation.
  

Legal and Compliance Questions

• Are there any liens or debts secured by the assets? Conduct UCC lien searches and request payoff letters to ensure assets transfer free and clear. Review any pending litigation, tax liabilities or environmental issues.
  
• Are licenses and permits current? Confirm that the business holds all required permits and that they are transferable. Ask about regulatory compliance in areas such as health, safety and employment law.
  
• Has the seller complied with SBA rules? If using a seller note toward the down payment, confirm it will be on full standby for the life of the SBA loan and that your cash equity meets the 10 percent requirement.
  

Personal Fit Questions

• Do I have the right experience? Lenders and investors look for industry or managerial experience. Assess whether your background positions you to successfully run the business.
  
• What is my transition plan? Plan how long the seller will stay involved, how you will train staff and how you will introduce yourself to customers and suppliers.
  

Partner With Experts

No single buyer can answer all these questions alone. Surround yourself with professionals: a CPA for financial due diligence, an attorney to review contracts and liabilities, and an SBA loan broker to structure financing. A thorough process may seem time‑consuming, but it prevents expensive surprises and improves your chances of loan approval.

How Pioneer Capital Advisory Can Help

At Pioneer Capital Advisory, we help business buyers navigate the SBA financing process. We’ll advise you on DSCR requirements, equity injections and seller notes. Working capital is sufficient and contracts align with SBA policies. With our guidance, you’ll ask the right questions and secure financing that matches your acquisition goals.

Ready to Start Your Acquisition?

Asking the right questions is the foundation of a successful acquisition. A disciplined due diligence process helps you understand the business you’re buying, avoid hidden pitfalls and negotiate fair terms. Contact us to learn how we can assist with your next acquisition and ensure your questions lead to confident decisions.