Due Diligence Checklist for Buying a Business
Due diligence is where deals get saved — or killed. Valuation and deal structure are only as good as the numbers behind them, and sellers, even honest ones, present their business in the best possible light. This checklist covers what to request and, more importantly, what to independently verify before you sign anything.
1. Financial due diligence
This is the core of the whole exercise. Request and verify:
- Three years of tax returns — and reconcile them to the internal P&Ls. Tax returns are harder to inflate than management accounts.
- Income statements, balance sheets, and cash-flow statements — monthly, for 24—36 months.
- Quality of earnings — recompute SDE/EBITDA yourself. Scrutinize every owner add-back; aggressive add-backs inflate the price. See SDE vs EBITDA.
- Bank statements — reconcile deposits to reported revenue to catch overstated sales.
- Are the statements compiled, reviewed, or audited? Only audited statements carry an accountant's opinion. Know what level of assurance you're relying on.
- Accounts receivable aging — old receivables may never be collected.
- Debt and liabilities — every loan, lease, and payable, including off-balance-sheet obligations.
2. Legal due diligence
- Corporate records, ownership, and good standing.
- All material contracts — customers, suppliers, leases, franchise or licensing agreements — and their assignability on a sale.
- Pending or threatened litigation and past judgments.
- Licenses, permits, and regulatory compliance.
- Intellectual property ownership and registrations.
- Employment agreements, contractor classifications, and any non-competes.
3. Operational due diligence
- Owner dependence — what happens when the owner leaves? If the business is the owner's relationships, value drops sharply.
- Documented systems and SOPs, or the lack of them.
- Key employees and the risk they leave after the sale.
- Supplier concentration and terms.
- Condition of equipment and any deferred maintenance.
- Capacity — how much growth is possible without new capital or labor.
4. Customer and revenue due diligence
- Customer concentration — any single customer above 10—15% of revenue is a serious risk.
- Recurring vs one-time revenue mix (see recurring-revenue valuation).
- Customer retention and churn trends.
- How customers are actually acquired, and whether that channel is durable.
- Reputation — reviews, complaints, and any brand risk.
5. Asset verification
Confirm the assets you're paying for actually exist and are worth what the seller claims — physical inventory counts, equipment inspections, real-estate appraisals, title searches. Don't skip this. These figures feed directly into your asset-based funding plan, so a mistake here costs you twice: once in the price, again at closing when the funding falls short.
Deal-breaking red flags
- Revenue that doesn't reconcile to bank deposits or tax returns.
- A seller who resists providing tax returns or limits verification.
- Declining revenue disguised by one-time spikes.
- Customer concentration the seller downplays.
- Undisclosed liabilities surfacing late.
- A seller unwilling to offer any financing or earnout — sometimes a vote of no confidence in the future.
Turn findings into terms
Diligence isn't pass/fail — it's leverage. Every problem you find is a reason to reduce the price, add an earnout, expand seller financing, or carve out the liability entirely. Re-run the numbers in the deal calculator as findings come in. And don't waive professional review — a CPA on the financials and an attorney on the contracts aren't optional; they're the two people most likely to catch what you'll miss on your first deal.
How to Apply This Guide
Turn the checklist into a request list with owners and deadlines. Each item should identify who will provide the document, who will review it, what question it answers, and what decision depends on it. This prevents diligence from becoming a folder of files nobody has interpreted.
When a finding changes the deal, update the model immediately. Lower SDE for unsupported add-backs, add working-capital needs for inventory shortages, reserve cash for repairs, or require escrow for unresolved liabilities. Diligence creates value only when it changes the offer, the terms, or the decision to proceed.