Business Due Diligence Checklist (for Buyers)

What due diligence is for

Due diligence is the investigation a buyer carries out after signing a letter of intent and before signing a binding purchase agreement. It has three jobs:

1. Verify the facts the price is based on: earnings, customers, assets and liabilities.
2. Find risks that were not disclosed or not understood.
3. Plan the transition and the first months of ownership.

Its outcome usually falls into one of three buckets: proceed, renegotiate price or terms, or walk away. A good diligence process makes any of those decisions easier to defend.

Scope depends on deal size and complexity. A small owner-operated business may need a focused review; a larger deal may justify a formal quality of earnings (QoE) report, legal review and specialist inspections. Your lender will also have its own requirements.

How to run the process

• Build a request list from the sections below and share it with the seller at the start.
• Use a data room (a shared folder is enough for small deals) and track what has been received.
• Assign owners: you, your accountant, your attorney, and any specialists.
• Set a timetable aligned with the LOI exclusivity period and your financing.
• Keep an issues log: each finding, its impact on value or risk, and how you propose to handle it (price, structure, indemnity, or walk away).

Financial due diligence

• Profit and loss statements and balance sheets, typically for the last three years and year to date.
• Federal and state tax returns for the same period; reconcile them to the financial statements.
• Bank statements to verify revenue deposits.
• Monthly revenue and gross margin trends, including seasonality.
• Detail and support for every add-back used to calculate SDE or EBITDA.
• Accounts receivable and payable agings; bad debt history.
• Inventory listings, counts and valuation method.
• Working capital needs and a proposed working capital target (peg).
• Capital expenditure history and upcoming needs.
• Debts, leases, liens and contingent liabilities.
• Budget or forecast, and the assumptions behind it.

Compare your normalized earnings with the earnings used to justify the price. If they differ, revisit the valuation and rerun the financing calculator.

Tax due diligence

• Sales tax, payroll tax and income tax filings and any notices or audits.
• Contractor vs employee classification.
• Nexus exposure in other states or jurisdictions (especially for online sellers).
• The tax impact of asset vs stock purchase structure (ask your tax adviser).

Legal due diligence

• Entity documents, ownership records and good standing.
• Material contracts: customers, suppliers, distributors, licences; check change-of-control and assignment clauses.
• Real estate leases and landlord consent requirements.
• Intellectual property: trademarks, domain names, software, content ownership.
• Permits and licences, and whether they transfer.
• Litigation, claims and disputes, past and pending.
• Regulatory compliance relevant to the industry (for example health, environmental, data privacy).
• Insurance policies and claims history.

Customers and market

• Revenue by customer for several years; calculate concentration.
• Contract terms, renewal dates and churn history.
• Customer acquisition channels and their costs.
• Pricing history and recent price changes.
• Reviews, complaints and reputation.
• Competitive landscape and any obvious threats.
• With the seller's agreement and at an appropriate stage, conversations with key customers.

Operations

• Process documentation and standard operating procedures.
• Supplier list, terms and concentration; any single-source risks.
• Equipment list, condition, maintenance records and remaining life.
• Facility condition and capacity.
• Key metrics the owner uses to run the business.
• What the owner personally does each week, and who could do it after closing.

Employees and management

• Organization chart, roles, tenure and compensation.
• Employment agreements, contractor agreements, handbooks and benefits.
• Key person risk: who would it hurt most to lose?
• Retention plans for critical staff.
• Any employment claims or disputes.

Technology and data

• Systems used (accounting, CRM, POS, ecommerce, hosting) and who owns the accounts.
• Website and domain ownership; analytics access for online businesses.
• Data security practices and any incidents.
• For SaaS: code ownership, architecture, technical debt, uptime and third-party dependencies. See buying a SaaS business.

Transition planning

• Length and scope of the seller's transition support.
• Customer and employee communication plan.
• Transfer of licences, accounts, banking and vendor relationships.
• First 100-day priorities.

Common red flags

After diligence: turning findings into decisions

For each material finding, decide whether it should change price (lower valuation), structure (more seller note, earnout, escrow or holdback), protection (specific representations, warranties and indemnities) or go / no-go. Document the reasoning; it will help with your lender and your own conviction at closing.

Due diligence checklist by business type

The core checklist applies to almost every acquisition, but the emphasis shifts with the business model.

Service businesses

Focus on people and relationships. Review who holds client relationships, how work is scheduled and priced, and whether licences or certifications sit with an individual. Check job costing to confirm that margins hold across different customer types, and look at backlog or recurring maintenance contracts.

Online and ecommerce businesses

Focus on traffic, platforms and data access. Request read access to analytics, ad accounts and payment processors rather than screenshots, and look for dependence on a single channel. See how to buy an ecommerce business.

SaaS businesses

Focus on recurring revenue quality and the codebase. Rebuild MRR from payment data, review cohort churn, and commission a technical review. See how to buy a SaaS business.

Asset-heavy local businesses

Focus on equipment, property and utilities. Commission equipment and building inspections, review the lease carefully and model upcoming capital expenditure. See how to buy a laundromat.

Building your diligence team

Engage advisers early enough that their findings can influence the purchase agreement. A finding that arrives the week before closing is much harder to act on.

A simple diligence timeline

1. Week 1: share the request list, open the data room, agree the timetable with the seller and lender.
2. Weeks 2-4: financial and tax review, customer and contract analysis, operational visits.
3. Weeks 3-6: legal review, specialist inspections, lender underwriting.
4. Final weeks: resolve the issues log, negotiate the purchase agreement, plan the transition.

Every deal runs at its own pace, so treat this as an outline, not a target. The point is to run workstreams in parallel rather than one after another.

Keep a findings log

For every finding, record what it is, the evidence, its estimated impact and your proposed response. This log becomes the backbone of your purchase agreement negotiation and gives your lender and advisers a clear picture of the risks you are accepting.

Use the interactive checklist

This guide explains what to check and why. To track your progress on a live deal, use the interactive due diligence checklist. It works in your browser, saves your progress on your device and can be printed or exported as a record for your advisors. Nothing you tick is sent anywhere.

Quality of earnings: what it is and when it is worth it

A quality of earnings (QoE) review is an independent analysis of a business's reported earnings, usually carried out by an accounting firm. It does not certify the accounts the way an audit does. Instead it asks a narrower, more practical question: are the earnings the price is based on real, repeatable and correctly adjusted?

A typical QoE review looks at:

• Proof of cash. Whether reported revenue matches money that actually arrived in the bank.
• Add-back validation. Whether each owner adjustment is supported by evidence and genuinely non-recurring or discretionary.
• Revenue quality. Concentration, churn, one-off sales and recognition timing.
• Working capital. What normal working capital looks like, which feeds into the working capital target in the purchase agreement.
• Run-rate adjustments. Costs a new owner will face that the current owner does not, such as a market salary for a manager.

Whether a formal QoE is worth the cost depends on the size and complexity of the deal and on lender requirements. For smaller owner-operated businesses, many buyers do a focused version themselves: a proof-of-cash test on bank statements, line-by-line add-back review and a customer revenue analysis. For larger deals, or where the books are messy, an independent review is often money well spent.

Questions to ask the seller directly

Documents tell you what happened; conversations tell you why. Ask these in person or on a call, and note the answers in your findings log:

1. What would you do with the business if you were staying for another five years?
2. Which customers, suppliers or employees would you worry about losing?
3. What takes up most of your week, and who else knows how to do it?
4. Has anything changed recently that is not yet visible in the numbers?
5. Are there any disputes, complaints or regulatory contacts, past or pending?
6. Why are you selling now?
7. What do you wish you had known when you started or bought the business?

Listen for answers that differ from the documents, and follow up on anything vague.

How diligence findings change the deal

Diligence rarely ends in a simple yes or no. Most findings lead to one of four responses:

• Price adjustment. Earnings turn out to be lower than presented, so the value falls with them.
• Structure change. A risk is real but uncertain, so part of the price moves into an earnout or seller note.
• Protection in the agreement. A specific risk is covered by a representation, warranty, indemnity or escrow.
• Walk away. The issue goes to the heart of why you wanted the business.

Agree in advance with yourself which findings would make you walk away. It is much harder to make that call after months of work and money spent.

Where diligence fits in the deal

Diligence usually starts once a letter of intent is signed and exclusivity is in place, and it is one stage in the wider process of how to buy a small business. Track progress item by item with the interactive due diligence checklist.