Buying a Business: Seven Questions to Resolve Before Closing

Illustrative image of a prospective buyer touring a manufacturing business with its owner

A business can look attractive on a financial summary and still be difficult to acquire successfully. A key customer may have a termination right. The premises may depend on landlord consent. Equipment may secure an outstanding loan. The purchase price is only one part of the transaction.

Before committing to a closing date, a buyer should be able to answer seven practical questions. The answers help translate diligence into a purchase agreement, a closing checklist and a workable transition plan.

1. What exactly are you buying?

In an equity purchase, the buyer acquires ownership of the entity, which generally continues to hold its assets and obligations. In an asset purchase, the parties identify the assets being transferred and the liabilities being assumed. Tax classification and transaction-specific rules can complicate that basic distinction.

List what the business actually needs: inventory, equipment, intellectual property, websites, telephone numbers, records, contracts and access credentials. Identify excluded assets expressly. An asset purchase should not be treated as a guarantee that all historical liabilities disappear; statutory obligations and successor-liability principles require separate analysis.

2. Does the revenue survive a change of ownership?

Review major customer and supplier contracts, not just the revenue totals attributed to them. Look for assignment restrictions, change-of-control provisions, termination rights, renewal dates and pricing commitments. Determine whether the seller’s personal relationships drive business that may not continue automatically.

Prepare a consent schedule showing the relevant agreement, required approval, responsible person and deadline. An equity deal may avoid an assignment but still trigger a change-of-control clause. Decide which consents are closing conditions and what happens if one is missing.

3. What supports the stated earnings?

Reconcile financial statements with tax returns, bank activity and underlying records. Question adjustments for owner compensation, unusual expenses and supposedly nonrecurring costs. A cost that disappears for the seller may be replaced by a real expense for the buyer.

Look beyond annual totals. Customer concentration, seasonality, deferred maintenance, aged receivables and obsolete inventory can affect the amount of cash the buyer needs after closing. Financial diligence and legal diligence should inform each other when a contract explains an accounting item or an accounting pattern reveals a contractual risk.

4. Which liabilities need a specific solution?

Review debt, liens, taxes, employee obligations, disputes, licenses and regulatory matters. For each material issue, decide whether it should be resolved before closing, reflected in price, addressed by a specific indemnity or supported by escrow or another source of recovery. A promise from a seller with no remaining assets may have little practical value.

California tax clearance deserves early attention. CDTFA Regulation 1702 addresses a purchaser’s obligation to withhold enough of the purchase price to cover covered seller tax liabilities unless the applicable receipt or clearance is obtained. Failure to withhold can create personal successor liability within the regulation’s limits. Coordinate the clearance request and escrow instructions; a contractual allocation of taxes does not itself bind the taxing agency. Other agencies or taxes may require separate treatment.

5. How will the closing payment be calculated?

Turn the agreed price into an example closing statement. Address cash, debt, transaction expenses, deposits, inventory and any working-capital adjustment. Define accounting principles, measurement dates, supporting schedules and a dispute process. Identify amounts paid to lenders, the seller and escrow separately.

For an applicable asset acquisition, buyer and seller generally report the allocation on IRS Form 8594 when the stated conditions are met. Coordinate the allocation with tax advisers before closing. The legal agreement and tax reporting should not rest on inconsistent assumptions about the assets and consideration.

6. What happens if a statement proves wrong?

Representations, disclosure schedules and indemnification work together. Review the survival periods, claim procedures, caps, deductibles, exceptions and exclusive-remedy provisions. Consider the practical evidence needed to establish a claim and the source from which it could be paid.

An earnout introduces another layer of risk. Define the metric, permitted business practices, access to information and treatment of a later sale or integration. A revenue target without rules for customer attribution or accounting can become a dispute rather than a useful bridge between valuations.

7. Can the business operate the morning after closing?

Map the handover of employees, payroll, insurance, licenses, banking, systems and premises. Confirm which permits require new applications. Identify who controls administrator accounts and how authority changes without interrupting service or exposing confidential information.

If the seller will assist after closing, document the services, duration, availability, compensation and handoff responsibilities. A vague promise to “help with transition” may not cover training, introductions or troubleshooting when the buyer needs them.

Closing should complete an operating plan as well as a legal transaction. The strongest purchase process connects what diligence reveals to the protections in the agreement and the people responsible for the first day of ownership.

Sources checked October 1, 2026. General information only; not legal or tax advice.