While you need to conduct your due diligence reviews in all aspects of the business, there are a few areas that are known as places to hide negative information or other items. Of course, the existing business owner would prefer that you not know about them. While you don't want to approach the review in a way that alienates the owner (you may need their goodwill to help you get off the ground later), you do need to be thorough, and it's fair to question anything that you don't understand or aren't happy with.

Hidden Debts

If the purchase price includes inventory or equipment, is it all paid for? Make sure that liens are listed and bills are paid (or outstanding balances due are noted) as you finalize the price. You don't want to pay $1,000 for existing pet supplies only to find out that the previous owner hadn't yet paid for them.

Overstated Earnings

Your accountant needs to review the income statements for the business to ensure that the previous owner really is generating the revenue and profits that are on the books. Accounting rules and procedures have been significantly tightened in recent years, due to financial scandals at several large multinational firms. If it can happen there, it can certainly happen down the road from you.

A craft business, for example, might have any number of items out on consignment, in which other retailers have taken on the inventory but will pay for it only when it sells. These need to be listed as part of the business's inventory, not sales, because if the items don't sell, the retailer can simply return them.

Receivables

Accounts receivable — money that customers owe the business — can be a tricky area. If you purchase the receivables, it can create an immediate cash flow for your business as the receivables become due and are paid. However, it's hard to dispute the amount or the payment terms with the customer if they disagree with these terms. First, you weren't privy to the conversation they may have had with the previous owner about discounts or extensions, and, second, you want to retain the customer's business.

If you don't purchase the receivables, the previous customers will pay their bills to the previous owner, and you're out of the loop. That means you're essentially asking longtime customers to go to the trouble of opening a new account with you, the new owner. This might be just the interruption the customer needs to start looking around at other sources of the products or services that you're offering.