Before you invest a significant amount of money you'll need to perform what's known as “due diligence.” This entails going over every element of the business to ensure that everything is as it should be. That's why you need an accountant who's familiar with this kind of business to review the books and why you'll want to inspect all inventory and capital equipment that's part of the sale. You also need to get a sense of customer loyalty.

As long as you conduct your due diligence properly and completely, you'll be able to reduce the risks of buying a business that you might not be familiar with. Of course, if you already know the business, the risks may be lower anyway — but do your reviews regardless to avoid any nasty surprises later on.

The Professionals

This is not a time to go it alone: call in a lawyer who specializes in business acquisitions and an accountant who can examine the books of the business. You can ask other businesspeople for recommendations or check with local chambers of commerce or small business development centers.

The Paperwork

Your lawyer should help you draft a “letter of intent,” in which you basically offer to buy the business. It should be nonbinding at this stage, however, meaning that either you or the business owner can walk away from the purchase process at any time. It will likely include a price for the business, what you expect to receive in return for that price, and any conditions that you want to place on the sale. Generally, you'll need the letter of intent for the business owner to release proprietary information such as financial statements.

In return, the business owner will probably ask you to sign a confidentiality agreement. When you sign this (after your lawyer has reviewed it), you're prevented from revealing any of the business's proprietary information to people outside the purchase process, and you can't use the information for any purpose other than the purchase.

Existing Contracts and Legal Obligations

If the business currently holds a lease or is a party to any kind of contract, whether it's for supplies, sales, or an alarm monitoring system, you (and your team of professionals) need to review the written paperwork (deeds, contracts, etc.) to ensure that you know the extent and conditions of the obligations you're taking on. And when it comes to a lease, be aware that you may have to renegotiate it or apply for a new one: Leases don't always survive a change in business ownership.

While you're at it, review every document that the business holds, from customer, supplier, vendor, and employee lists to its marketing materials, business structure, and job descriptions. If it has certifications or licensing from specific professional, governmental, or educational institutions, check with the institution to make sure that all is in order.

Financial Statements

Your accountant will need to review the tax returns and business financial statements for the previous three to five years as part of the due diligence process. As part of the sale preparation, the business owner should have had a qualified accountant audit the statements: If this hasn't been done, you can insist on it or pay for it to be done. Check that any taxes that are shown as due annually have been paid up.