Questions to ask when buying a business: customer contracts, suppliers and share ownership

Looking to buy a business? Before you make a decision, there are three things you should ask the seller to disclose: the contracts with customers, the contracts with suppliers, and the internal registers of the company. Between them, they tell you how the business makes money, what it depends on, and whether the person selling it actually has the right to. This guide explains what to look for in each.

Questions to ask about customer contracts

First, ask the seller to disclose the standard terms of business that are used with the target's customers. These terms will help you understand how much liability the business might be exposed to when dealing with its customers. What has the business promised, what happens if it falls short, and who carries the cost?

Beyond the standard terms, look at the individual customer contracts and ask:

• How long is each contract? Ideally, contracts with good clients are long, because that is revenue you can rely on after completion.
• How much money is the business supposed to make per contract? This tells you which customers matter most and how concentrated the revenue is.

Change of control clauses in customer contracts

Very importantly, you want to know about change of control provisions. A change of control provision may allow one of the parties to terminate the contract if the other party is subject to a change of control, which in plain terms means the business has changed hands.

If you buy the business and a key customer has a change of control clause, that customer may be entitled to walk away on the day you complete. So this is not a technicality. It goes to whether the revenue you are paying for will still be there afterwards.

To find these clauses, open each contract and run a search for "change of control". Then read the clause carefully. Check what triggers it, who can rely on it, and what they are entitled to do. If the clause is there, you will want to deal with it before completion rather than discover it afterwards.

Supplier contracts: what to check

Second, ask the seller to disclose the contracts signed between the target business and its suppliers. You want to understand:

• How strong are those relationships? A business can depend on a supplier just as much as on a customer.
• How long are the contracts? A supplier contract that ends shortly after completion may need renegotiating on terms you do not control.
• How much is the business paying each supplier every month? This feeds directly into your understanding of the running costs.
• Which supplier contracts are necessary for running the business? Some suppliers are nice to have. Others are essential, and if one of those contracts is short or expensive, that is a risk you need to price in.

For the essential ones in particular, check how long they run and how costly they are. The commercial side of due diligence is covered in more depth in commercial contracts due diligence.

Does the seller own the shares? Check the registers

The third thing to ask the seller to disclose is the internal registers of the company, also known as the statutory registers.

One of the things the internal registers tell you is the ownership history of the company: who has held the shares, and who holds them now. The person presenting themselves as the seller of the company needs to be the last recorded owner of those shares, and therefore the person entitled to sell them to you. If the register says otherwise, you have a problem that must be resolved before you go any further.

Then cross-reference the information in the internal registers against what is filed at Companies House. Look for any inconsistencies or omissions between the two, and ask the seller to explain them. Discrepancies are more common than you might expect, and they are much easier to fix before completion than after. For the full review of a company's records, see corporate records due diligence.

Next steps

Put these three requests to the seller in writing at the start of due diligence: the customer terms and contracts, the supplier contracts, and the statutory registers. Read every customer contract for a change of control clause, identify the suppliers the business cannot run without, and confirm the seller's ownership against Companies House. Then have a corporate solicitor review what comes back before you agree the final terms.