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Free buyer resource · Due diligenceCheck it before you sign
What to verify in a business's finances, contracts and operations before closing, and who can help you do it.
Free guide · No fees for buyersDue diligence is the investigation a buyer does after the letter of intent and before closing. It confirms that the business's financial statements match its tax returns and bank records, that leases, contracts and licences can transfer, that there are no hidden debts or legal claims, and that customers and key staff are likely to stay. It commonly takes 30 to 90 days.
The letter of intent agrees the price on the assumption that what the seller told you is true. Due diligence is how you find out, and it is your best protection against expensive surprises.
This free guide sets out the main areas to cover. Bring in an accountant and an attorney for the financial and legal review; their fees are small compared with the cost of a bad purchase.
How to do it
Verify the financials
Match the profit and loss statements to the tax returns and bank statements for at least three years. Test the add-backs behind the SDE figure, and review receivables, payables and any debt.
Review legal documents
Check the company formation documents, the lease, supplier and customer contracts, licences, permits and any intellectual property. Confirm which contracts can be assigned and which need consent.
Search for liabilities
Run lien and judgment searches, check for pending lawsuits, unpaid taxes and any regulatory issues. Ask how the purchase agreement will deal with liabilities that come up after closing.
Assess operations
Inspect equipment and premises, review key processes and systems, and check stock levels. Ask which tasks only the owner can do today.
Understand customers and staff
Look at revenue by customer to spot concentration, review churn and contracts, and check staff roles, pay and any key-person risk. Plan how you will keep key people.
Decide and renegotiate if needed
If you find problems, you can ask for a lower price, special protections in the purchase agreement, an escrow or holdback, or walk away.
Options compared
| Area | Key documents | Common red flags |
|---|---|---|
| Financial | P&L, balance sheets, tax returns, bank statements | Tax returns lower than reported profit |
| Legal | Lease, contracts, licences, corporate records | Lease cannot be assigned or ends soon |
| Operational | Equipment list, processes, systems, stock | Old equipment needing early replacement |
| Commercial | Customer list, sales by customer, pipeline | One customer above a large share of revenue |
| People | Org chart, payroll, employment terms | Business depends on the owner or one employee |
General information only. Figures and rules vary by deal, lender and location.
Common mistakes
- Skipping the tax-return check because the P&L looks good.
- Leaving the lease review until the last week.
- Doing everything yourself instead of using an accountant and attorney.
- Letting the exclusivity period run out before you finish.
Frequently asked questions
How long does due diligence take?
For a small business it commonly takes 30 to 90 days, depending on how organised the seller's records are and whether a lender is involved.
Who should help with due diligence?
An accountant for the financial review and an attorney for contracts and legal issues are standard. Industry specialists can inspect equipment or premises.
What is a quality of earnings report?
A quality of earnings (QoE) report is an accountant's detailed review of whether the business's reported earnings are accurate and sustainable. It is common in larger deals.
What happens if I find a problem?
You can renegotiate the price, add protections such as an escrow or specific warranties to the purchase agreement, ask the seller to fix it before closing, or walk away.
Can the seller refuse to share information?
They can, but refusing access to records you reasonably need is itself a warning sign. Agree on access in the letter of intent.
Is due diligence different for an asset purchase?
Yes. In an asset purchase you mainly verify the assets you are buying and the contracts you are taking on. In a share purchase you inherit the company's full history, so the legal review is wider.
Ready to move forward?
Questions about this step? Email [email protected] and we will point you to the right guide.
BusinessBuy.site provides free educational information, not legal, tax, lending or investment advice. Speak to a qualified accountant, attorney or lender about your deal.