To buy an existing business, you need a funded buyer behind a formed legal entity, financing lined up, thorough due diligence on the seller’s books and contracts, fresh licenses and insurance under your name, a carefully drafted purchase agreement, tax clearances from the state, and a plan for transferring employees and intellectual property. The question of what you need to buy a business breaks into roughly a dozen moving parts, and skipping any one of them tends to cost more than doing it right the first time. The sections below walk through each requirement in roughly the order you will meet it.
What to Have Before You Approach the Seller
Sellers will not open their books to a stranger. Expect to sign a non-disclosure agreement first, protecting the seller’s trade secrets, customer lists, and internal financials while you evaluate the business. Once you have reviewed enough to form a preliminary view on value, you and the seller typically sign a letter of intent spelling out the proposed price and deal structure. The letter is usually non-binding, but it often gives you an exclusivity window so the seller is not fielding competing offers while you dig deeper.
You also need proof that you can pay. Sellers expect a proof of funds letter from your bank or a pre-approval from a commercial lender showing you have access to enough capital. Without it, most sellers will not move past preliminary conversations.
Financial Records to Request
The core of due diligence is financial records. Request at least three years of profit and loss statements, balance sheets, and federal tax returns. Compare the internal financial statements against the tax filings line by line. Gaps between what the business reports internally and what it reports to the IRS are a red flag for unreported income or inflated expenses. Review bank statements to confirm that actual deposits match the revenue figures in the financial statements. If the seller uses an outside accountant, ask that accountant to verify the numbers directly.
Financing the Purchase
Few buyers pay cash. The structure of your funding affects closing timelines and your cash flow after you take over, so sort it out early.
- SBA 7(a) loans. The Small Business Administration’s 7(a) program is the most common government-backed option for buying a business. These loans can be used for changes of ownership and carry a maximum loan amount of $5 million, with the SBA guaranteeing up to 75 percent of the loan. You will need to show that the business is profitable, that you are creditworthy, and that you could not get comparable terms from a non-government lender.1U.S. Small Business Administration. 7(a) Loans
- Seller financing. In many small business sales, the seller carries a note for a portion of the purchase price. The buyer typically puts down 30 to 50 percent and pays the balance over three to seven years. The arrangement signals the seller’s confidence in the business and lowers your upfront capital requirement.
- Conventional bank loans. Traditional commercial loans work for buyers with strong credit, significant collateral, or an existing banking relationship. Banks will want to see the target’s financials, your personal financial statement, and a business plan showing how you will service the debt.
A common structure stacks sources: an SBA loan for the majority, seller financing for 10 to 20 percent, and your own equity filling the gap.
A Legal Entity and EIN
You need a legal entity in place before you can sign a purchase agreement, hold licenses, or open a business bank account. Most buyers form either a limited liability company or a corporation, both of which separate personal assets from the business’s debts and lawsuits. You file formation documents with your state’s Secretary of State, and those documents must name a registered agent who can receive legal notices on the entity’s behalf.2Office of the Law Revision Counsel. 26 USC 6109 – Identifying Numbers
Once the state recognizes the entity, apply for an Employer Identification Number from the IRS using Form SS-4.3Internal Revenue Service. About Form SS-4, Application for Employer Identification Number (EIN) The nine-digit number functions like a Social Security number for the business and is required for tax filings, hiring, and bank accounts. The online application on the IRS website issues the EIN immediately. How you classify the entity on the form determines whether it is taxed as a sole proprietorship, partnership, S corporation, or C corporation.
Filing fees for formation documents vary by state but generally fall between $50 and $500. After formation, draft an operating agreement (for an LLC) or bylaws (for a corporation) covering ownership percentages, decision-making authority, and profit distribution. These internal documents are not filed with the state, but they prevent disputes among owners later.
Licenses, Permits, Zoning, and Environmental Review
The seller’s licenses do not automatically transfer. You will need to apply for fresh credentials under your new entity, and some of these take weeks or months.
- A general business license from the municipality, which usually requires your business address, entity information, and owner identification.
- A sales tax permit from your state’s revenue department if the business sells taxable goods or services. These are tied to your entity and EIN, not the seller’s.
- Industry-specific permits. Food service businesses need health department permits, which typically require a premises inspection. Liquor license transfers involve background checks and public notice periods that can stretch past 60 days. Construction, healthcare, and childcare each carry their own licensing layers.
Start applications as early as your state allows. Many jurisdictions let you file before the closing date, which prevents a gap in operations on day one.
Verify that the business location remains compliant with local zoning laws under your intended use. If you plan to change or expand what the business does, the current zoning classification may not cover the new activity. A quick check with the local planning department before closing is far cheaper than discovering a violation afterward.
If the business involves real estate, especially in manufacturing, gas stations, dry cleaning, or any industry that handles chemicals, order a Phase I Environmental Site Assessment before closing. The assessment reviews the property’s history for potential contamination, and completing one is how you qualify for the “innocent landowner” and “bona fide prospective purchaser” protections under the federal Comprehensive Environmental Response, Compensation, and Liability Act.4Office of the Law Revision Counsel. 42 USC 9601 – Definitions Without that assessment, you could inherit liability for contamination that happened decades before you bought the property. Cleanup costs in these situations can dwarf the purchase price of the business itself.
Lease Assignment and Contract Consents
For most small and mid-sized businesses, the commercial lease is the single most important contract outside the purchase agreement. If the business rents its space, you cannot simply step into the seller’s shoes. Nearly every commercial lease requires the landlord’s written consent before the tenant can assign the lease to a new owner. The landlord will evaluate your financial strength, and the consent agreement typically requires you to formally assume all tenant obligations, including rent and maintenance. Expect to pay the landlord’s attorney’s fees for reviewing the assignment.
One point trips up many buyers: the original tenant often remains liable even after the assignment. That does not directly hurt you, but it gives the landlord extra leverage in negotiations. If the landlord refuses consent, you may have to negotiate a new lease entirely, which changes the economics of the deal.
Beyond the lease, review every contract the business depends on. Vendor agreements, customer contracts, equipment leases, and service subscriptions may contain assignment clauses that require counterparty consent or that terminate automatically on a change of ownership. Identify these early so you can get consent letters in hand before closing day.
The Purchase Agreement
The purchase agreement is the legal backbone of the deal. The two main structures are an asset purchase and a stock (or membership interest) purchase, and the choice has real consequences for liability and taxes.
In an asset purchase, you buy specific items: equipment, inventory, customer lists, intellectual property, and goodwill. You generally do not inherit the seller’s liabilities unless you explicitly agree to assume them. This is why asset purchases dominate small business sales. In a stock purchase, you buy the seller’s ownership interest in the entity itself, which means you step into everything, including debts, pending lawsuits, and contractual obligations you may not even know about. Stock purchases are more common in larger transactions where transferring contracts and licenses individually would be impractical.
Purchase Price Allocation
In an asset purchase, you and the seller must agree on how the total price is divided among categories of assets. Both parties report the allocation to the IRS on Form 8594, the Asset Acquisition Statement.5Internal Revenue Service. Instructions for Form 8594 The allocation determines your depreciation and amortization deductions going forward. Tangible assets like equipment are depreciated over their useful life, while goodwill and other intangibles covered by Section 197 are amortized over 15 years.6Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
Buyers and sellers often have competing interests here. You generally want more of the price allocated to assets that depreciate quickly, giving you larger near-term deductions. The seller may prefer a different allocation for their own tax reasons. Negotiate this before signing, because both parties must file consistent allocations.
Representations, Warranties, and Indemnification
The seller’s representations and warranties are the factual promises embedded in the agreement: that the seller has the legal authority to sell, that the financial statements are accurate, that there are no undisclosed lawsuits, that no liens exist on the assets being transferred. If any of those statements turns out to be false, your indemnification clause is what gives you a legal claim against the seller for the resulting losses. Pay attention to survival periods (how long after closing you can bring a claim), caps on the seller’s liability, and carve-outs for specific risks.
Non-Compete
A non-compete clause, either built into the purchase agreement or signed as a separate document, prevents the seller from opening a competing business in the same area for a defined period after the sale. Without it, nothing stops the seller from taking their industry knowledge, customer relationships, and reputation and setting up shop down the street. Non-competes tied to the sale of a business are generally easier to enforce than those in employment contracts, because courts recognize that the buyer paid for the goodwill of the business. The restriction must still be reasonable in geographic scope and duration. Covenants not to compete connected to a business acquisition are also Section 197 intangibles, amortized over 15 years for tax purposes.6Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
Working Capital Adjustment
Many purchase agreements include a working capital adjustment that fine-tunes the final price based on cash, receivables, inventory, and short-term liabilities at closing. The parties negotiate a target figure based on historical averages. If actual working capital at closing exceeds the target, you pay the seller the difference. If it falls short, the seller reimburses you. The mechanism prevents a common problem: the seller draining receivables or running down inventory in the weeks before closing.
Tax Clearance and Successor Liability
In an asset purchase, many states impose successor liability for the seller’s unpaid sales tax, payroll tax, and sometimes income tax. If the seller owes back taxes and you close without addressing it, the state can come after you for those debts.
The standard protection is a tax clearance certificate from the state’s department of revenue before closing. The certificate confirms the seller has no outstanding tax liabilities with the state. If the seller cannot produce one, either escrow a portion of the purchase price to cover potential liabilities or delay closing until the seller resolves the issue.
A handful of states still enforce bulk sale notification laws, which require the buyer to notify the state tax authority by certified mail before taking possession of the business. Notification deadlines typically fall between 10 and 45 days before closing, depending on the state. Failing to comply can make you personally liable for the seller’s unpaid taxes. Most states have repealed their bulk sale statutes, but check whether yours still has one on the books.
Employee Paperwork
If you are keeping the seller’s employees, federal law gives you two options for employment verification. You can treat them as new hires and complete fresh I-9 forms, or treat them as continuing employees and keep the seller’s existing I-9s on file.7USCIS. Mergers and Acquisitions If you keep the old forms, you inherit responsibility for any errors in them. Many buyers complete new I-9s to start clean, but the timeline is tight: the employee must complete their section by the first day of employment, and you have three business days to finish yours.
If the business has 100 or more full-time employees and you plan to lay off a significant number after the acquisition, the federal Worker Adjustment and Retraining Notification Act likely applies. It requires 60 days’ advance written notice before plant closings affecting 50 or more employees or mass layoffs meeting specific thresholds. Many states have their own versions with lower employee counts and longer notice periods.
Unemployment insurance also catches buyers off guard. When you acquire a business, the seller’s unemployment tax experience rating often transfers to your new entity. If the seller had a history of frequent layoffs, you could inherit a higher tax rate. In a full asset transfer, most states transfer the entire experience account to the new owner. Factor the inherited rate into your operating cost projections.
Insurance in Place by Closing
You need policies active by the closing date. Lenders will require it, landlords will require it, and operating even a single day without coverage exposes you to losses that could wipe out the investment.
- General liability insurance covers injuries to customers and damage claims. Nearly every business needs this regardless of industry.
- Workers’ compensation is required in almost every state once you have employees. The specific threshold varies, but most states mandate coverage once you have even one or a few. Your policy must be in force before anyone reports to work under your ownership.
- Commercial property insurance covers the building and its contents if you own the real estate. Even if you are leasing, your landlord’s policy does not cover your equipment, inventory, or tenant improvements.
- Professional liability (errors and omissions) protects against malpractice claims if the business provides professional services like consulting, accounting, or healthcare.
Contact an insurance broker at least 30 days before your expected closing date. Some policies require inspections or underwriting reviews that take time. The seller’s existing policies do not transfer, so you are building coverage from scratch.
Intellectual Property Transfers
If the business owns federal trademarks, patents, or copyrights, transferring them requires more than a line in the purchase agreement. Trademark and patent assignments should be recorded with the U.S. Patent and Trademark Office through its Assignment Center.8United States Patent and Trademark Office. Assignment Center You will need a USPTO.gov account to submit the recordation. Domain names, social media accounts, and software licenses each have their own transfer procedures dictated by the registrar or platform. Build a complete list of every digital and intellectual property asset during due diligence and confirm the transfer method for each one before closing.
Closing and Immediate Post-Closing Filings
On closing day, both parties meet, usually with their attorneys present, to execute the purchase agreement, bills of sale, and ancillary documents like the non-compete and lease assignment. An escrow agent or attorney holds the purchase funds and releases them to the seller once all conditions are satisfied.
Once the wire clears, the operational handoff begins immediately. The seller should deliver facility keys, alarm codes, equipment manuals, vendor contact lists, and access credentials for websites, email accounts, and software platforms. Plan the handoff in advance with a written checklist.
After closing, file any required transfer documents with your state’s Secretary of State to update the business’s official records. Notify the state department of revenue about the change in ownership. Update accounts with utility companies, banks, and insurance providers. If you filed Form 8594 for the purchase price allocation, both you and the seller must attach it to your income tax returns for the year of the sale.9Internal Revenue Service. About Form 8594, Asset Acquisition Statement Under Section 1060 Missing any of these post-closing steps will not undo the deal, but it creates administrative problems that compound over time.