What You Should Know Before You Buy That Small Business

Beware the seller who tells you his actual ODI is greater than what he reports -- if he's taking extra cash out of the till, understating income on his tax returns, or treating personal expenses as business write-offs, what are the odds he is being scrupulously honest with you?

The location of the nearest big competitor: If you're looking to buy a retail or service business, chances are there's at least one franchise or "big box" competitor that will wipe you off the map if they ever come to town. Where's the nearest outlet or franchisee? If you're buying a local hardware store, don't be afraid to call Home Depot and Lowe's and find out if they have plans to build a local store anytime soon. You might just learn what they're going to build on that 2-acre parcel just off the interstate.

Sales taxes: When you buy the assets of a business, you avoid responsibility for the seller's debts, obligations and liabilities (other than his lease and other debts you expressly agree to assume and continue paying). Except ... for sales taxes. If your seller has been underreporting his sales taxes, and the state tax authority finds out about it, they can come after you for everything the seller owed. You can sue your seller, of course, but by then he's fled to Timbuktu and can't be tracked down.

Don't pay a penny for a small business until you know the seller has filed all state and local sales tax returns. Ask your attorney if you can get a "clearance certificate" from the state tax authority saying they won't come after you for any sales taxes your seller owed.

Local business reputation: Don't rely on just "hard data." Go to the library and skim the local newspapers going back at least five years. Is the business active in the community? Is it written up frequently? Is there negative publicity? Go to the local police station and ask if there are frequent complaints by or against the current owner.

Spend some time talking to the locals -- hang out at the local library, senior center, coffee shops and public parks and talk to the "old timers" who congregate there. Yes, it's tedious and time-consuming, but it may save you from making a deal you will live to regret.