1. Will demand exist for the business' products and services for years to come?
Many buyers purchase companies based on their interests rather than whether they are viable moneymakers, such as when a foodie buys a restaurant, says Ronald Recardo, managing partner of the business consultancy Catalyst Consulting Group.
"If you chase the wrong rabbit and buy the wrong business, it doesn't matter how smart you are. You might not be able to bring it back," he says.
The business should also have a competitive advantage and not be a fad, said entrepreneur David Lopez, who has started, bought and sold several different kinds of businesses, including Froots, Franchise Value Solutions, Bingo Dental and Cross Country Auto Transport and Dental Fix Rx.
2. Are there holes in the financials?
Buyers should request bank statements, profit and loss statements, contracts with suppliers and employees, lease agreements and tax returns from the seller as part of their due diligence, said Alan Pinck, an enrolled tax agent and owner of A. Pinck & Associates, and volunteer for the federal business assistance program Service Corps of Retired Executives.
House said to request revenues broken out by key product areas and customer groups. Examine trends over time and scrutinize any prepaid services such as Groupon deals and memberships, which the new owner would have to honor without being paid for, Pinck said.
"The smaller the business, the less sophisticated. You can ask all the right questions but they might not have the data available, or the data is in their head," Recardo said.
If a seller cannot produce data or it's in a shoe-box, that may be indicative of the state of the business too, according to Lopez. Every piece of equipment and inventory must be valued and itemized for the IRS by both buyer and seller. Both accounts should match, Pinck said.