Buying a Business in Texas: Due Diligence Checklist

Buying a business in Texas is a due diligence exercise: before you close, you confirm that the company is what the seller says it is, that the price reflects reality, and — critically in Texas — that you won’t inherit the seller’s unpaid taxes. This checklist walks the verification in four parts (entity, financial, legal, and operational), then covers the Texas-specific tax-clearance step that buyers most often miss, and the closing items that finish the deal. It assumes you’ve already settled on a valuation and a deal structure.

1. Verify the Entity and Ownership

• Confirm the entity exists and is in good standing with the Texas Secretary of State.
• Verify who actually owns it — the cap table, any pledges or liens on ownership interests.
• Review the formation documents, bylaws or company agreement, and any owner/buy-sell agreements.
• Run UCC lien searches; confirm whether assets are pledged as collateral.

2. Examine the Finances

• Three years of financial statements and tax returns, reconciled to bank statements.
• Accounts receivable aging (collectability) and accounts payable.
• Normalized earnings — back out owner perks and one-time items, as in valuation.
• Confirm the tax filings are current: federal, Texas sales/use tax, and Texas franchise tax.

3. Review the Legal and Operational Picture

• Material contracts — customers, suppliers, leases — and whether they’re assignable or need consent to transfer.
• Employment matters: key-employee agreements, non-competes, benefit obligations.
• Licenses and permits, and whether they transfer or must be reissued (e.g., TABC permits for alcohol).
• Intellectual property ownership and registrations.
• Pending or threatened litigation and any regulatory issues.
• Insurance history and claims.

4. The Texas Tax-Clearance Step Buyers Miss

This is the one most generic checklists omit, and it can cost a buyer dearly. Under Texas Tax Code §111.020, if you buy a business or its stock of goods, you must withhold enough of the purchase price to cover the seller’s unpaid state taxes until the seller gives you a Comptroller’s receipt showing the taxes are paid or a certificate of no tax due. A buyer who fails to withhold becomes personally liable for the seller’s unpaid taxes, up to the purchase price. The protection has to be set up before closing — request the certificate from the seller (or directly from the Texas Comptroller) and hold back funds in escrow until it’s produced. Skipping this step is how buyers end up paying the previous owner’s sales-tax bill.

5. Close the Deal

• Negotiate the purchase agreement with representations, warranties, and indemnification.
• Confirm the asset-vs-stock structure and the purchase-price allocation.
• Resolve liens, consents, and the tax-clearance holdback.
• Plan the transition — training, key-relationship handoffs, and any seller non-compete.

Frequently Asked Questions

What is the most overlooked step when buying a business in Texas?

The Texas tax-clearance step under Tax Code §111.020. Buyers must withhold purchase-price funds until the seller provides a Comptroller receipt or certificate of no tax due, or the buyer can be held personally liable for the seller’s unpaid taxes up to the purchase price.

How much financial history should I review before buying a business?

At least three years of financial statements and tax returns, reconciled to bank records, plus receivables aging and confirmation that federal, sales/use, and Texas franchise tax filings are current.

Do contracts and licenses transfer automatically when I buy a business?

Not necessarily. Many contracts and leases require the other party’s consent to assign, and some licenses or permits (such as TABC permits) must be reissued rather than transferred. Confirm transferability during due diligence.

Should the deal be an asset or a stock purchase?

It depends on tax and liability goals. Buyers often prefer asset purchases for the step-up in tax basis and the ability to leave liabilities behind; the structure should be decided with the valuation, not after.

Thorough due diligence — including the Texas tax-clearance step — is what keeps a business purchase from becoming an inherited liability. Reidel Law Firm guides Texas buyers from diligence through closing on a flat fee. Get help buying a business.