Due Diligence Tips for Buyers Purchasing a Business in Connecticut

You’ve found it. The listing looks perfect. The location in Connecticut is ideal, the revenue numbers on the summary sheet are impressive, and you can already picture yourself holding the keys.

But before you sign the closing documents, you have to verify that what you think you are buying is actually what you are buying.

A business listing is a marketing document. The truth of the business - its actual profitability, its legal standing, and its operational health - is found during due diligence. This investigation period is your primary protection against buying a "lemon."

As expert business brokers, we guide buyers through this complex process every day. Here is your roadmap to conducting proper due diligence in Connecticut.

Phase 1: Financial Due Diligence – The Bedrock

The first question every buyer has is, "Does this business actually make money?" To answer this, you must go beyond the tax returns.

The "Big Three" Documents

You cannot perform a proper business valuation without requesting these three essential documents for the last 36 months:

• Federal Tax Returns: To see what was reported to the IRS.
• Profit & Loss (P&L) Statements: To see month-by-month performance.
• Balance Sheets: To see assets and liabilities.

Understanding SDE vs. Net Income

Most small businesses are run to minimize taxes, meaning they often show a low net income. However, as a buyer, you are interested in Seller Discretionary Earnings (SDE). This figure adds back the owner's salary, personal benefits (like a company car), and one-time expenses to show the true cash flow available to you.

Pro Tip: Look for trends. If you are buying a seasonal business in a coastal town like Milford or Branford, ensure the monthly P&Ls reflect the seasonal spikes you expect. A dip in July for a Shoreline business is a red flag that requires explanation.

Phase 2: Legal & Compliance – Avoiding Hidden Landmines

You aren't just buying assets; you are stepping into a legal entity. You must ensure that entity is clean.

• Good Standing: Verify the business is in "Good Standing" with the Connecticut Secretary of the State (CONCORD).
• Lease Transferability: In the Shoreline area, location is often the business’s most valuable asset. Review the lease carefully. Is it transferable? Are there options to renew? Losing a prime location shortly after purchase can destroy the business's value.
• Intellectual Property: Does the business legally own its name, logo, and recipes? Ensure they haven't been "borrowed" from a competitor or never properly trademarked.

Phase 3: The "Successor Liability" Trap (Critical for CT Buyers)

This is one of the most overlooked risks when buying a business in CT. Under Connecticut law, if a business owner owes Sales & Use Tax, Admissions Tax, or Unemployment Insurance taxes, the liability can follow the business, not the seller. If you buy a business that has unpaid taxes, the state of Connecticut can come after you for the debt, even though you didn't own the business when the debt was incurred.

How to Protect Yourself

To avoid inheriting someone else’s tax bill, you must request a Tax Clearance Certificate (often involved with Form AU-866) from the Connecticut Department of Revenue Services (DRS). This document confirms that the seller has paid all necessary taxes.

Phase 4: Operational Due Diligence – Under the Hood

Spreadsheets don't tell the whole story. You need to verify the physical realities of the business.

• Equipment Inspection: That delivery truck or commercial oven might look good on a balance sheet, but is it working? Check for maintenance logs and age.
  
  
• Inventory Check: Is the inventory fresh and in sellable condition? Watch out for "dead stock"—products that have been sitting on shelves for years but are still counted as valuable assets.
  
  
• Staffing: In the current Connecticut labor market, good employees are gold. Will key staff stay after the transition? Do they have non-compete agreements?
  
  

Phase 5: The "Soft" Due Diligence – Culture & Reputation

Finally, look at what the community says about the business.

• Online Reputation: Check Google, Yelp, and social media reviews. Are there recurring complaints about service or quality?
  
• Owner Dependence: Is the business "The Owner's Show"? If the current owner is the only one who knows the recipes or holds the client relationships, the business may falter when they leave.
  
  

Why You Need a Broker for This Process

Due diligence is technical, but it is also emotional. Sellers can get defensive when you question their financials or operations.

Working with First Choice Business Brokers - Shoreline gives you a professional buffer. We ask the tough questions and manage the document flow, allowing you to maintain a positive relationship with the seller—which is vital, as you will likely need their help training you during the transition.

Whether you are looking for a detailed business valuation in Connecticut or are ready to make an offer, you need an expert on your side.

Disclaimer: The information provided in this blog post is for educational purposes only and does not constitute legal, financial, or tax advice. Buyers should always consult with qualified professionals, including attorneys and accountants, before making any business purchase decisions.