Business Due Diligence Checklist

Before you start: get the contingency in writing

Diligence only protects you if your letter of intent gives you a defined period, exclusivity so the seller isn't shopping you, and the unambiguous right to terminate if what you find doesn't match what you were told. Agree on the document list itself in the LOI too. A large share of deals that collapse in acrimony do so because the buyer asked for something in week five that the seller believed was never part of the deal.

1. Financial diligence — does the money actually exist?

This is where a deal is won or lost. Request three years of business tax returns, three years of P&L statements and balance sheets, year-to-date financials, and bank statements covering the same period. Then do the one test that matters most: reconcile the P&L to the tax returns. A seller's internal statements are marketing; the return is the number they were willing to swear to. Unexplained gaps between the two are the single most common reason a deal should die.

Next, take the add-back schedule apart line by line. Add-backs are legitimate — the owner's above-market salary, a personal vehicle, a one-time legal expense — but each one needs support. Anything you can't document gets removed from cash flow, which lowers both what a lender will fund and the defensible price. Our guide on how to value a business walks through how that flows into the multiple.

• Bank statements vs. reported revenue. Deposits should trace to the top line. Heavy cash businesses need extra scrutiny, and unreported cash revenue is worth zero to you — you cannot finance it or resell it.
• Accounts receivable aging. Old receivables are often uncollectible revenue already counted as profit.
• Inventory. Count it, and value obsolete stock honestly. Book value and sale value diverge fast.
• Debt, liens, and tax obligations. Run a UCC search and confirm payroll and sales tax are current. Unpaid trust-fund taxes can follow the assets.
• Working capital. Establish what normal looks like and who funds it at closing — this is negotiated far too late in most small deals.

2. Customer and revenue diligence — will it survive the handoff?

Ask for revenue by customer for each of the last three years. You are testing two things: concentration and durability. If one account is more than roughly 20–25% of revenue, the business has a single point of failure, and if that relationship is personal to the seller, you are buying a risk rather than an asset. Look for churn patterns, whether revenue is contracted or transactional, and whether the pipeline is generated by a system you can run or by the owner's personal network. Also read the online reviews, in date order — a service business whose ratings started sliding eighteen months ago is telling you something the P&L hasn't yet.

3. Legal and contractual diligence

The lease is the item most likely to kill a Main Street deal late, and it is the one buyers check last. Confirm the remaining term, renewal options, rent escalators, and above all whether the landlord will assign or issue a new lease for at least the length of your financing. Then work through corporate records and entity standing, all licenses and permits and whether they transfer or must be reissued, franchise consent if applicable, key vendor and supplier agreements, employment and non-compete agreements, insurance policies with loss runs, and any pending or threatened litigation. Ownership of the things that aren't on the balance sheet matters too: the domain, the phone number, the social accounts, the customer database, and the software licenses.

4. Operational and people diligence

Spend time inside the business. Ask who actually performs the work, what happens when the owner is away for two weeks, and which single employee's departure would hurt most. Get an employee roster with roles, pay, tenure, and classification — misclassified contractors are a common and expensive inherited liability. Then map how the work gets done: which processes are documented, which live only in the owner's head, what the equipment condition and replacement schedule look like, and how deferred maintenance has been handled. Negotiate a training and transition period explicitly rather than trusting goodwill.

5. Red flags that should end a deal

What to do with what you find

Most diligence findings are neither fatal nor free. You generally have four moves: reprice, restructure so the seller carries the risk through a holdback, earnout, or indemnity, require a fix as a condition of closing, or terminate. The distinction worth holding onto is between a valuation problem and a character problem. A liability you discover is a negotiation. A liability the seller hid is information about every representation they have made and everything you haven't checked yet. A seller note keeps the seller financially exposed after closing, which is why buyers who find fixable problems often push structure rather than price — see our guide on low-cash deal structures for how that works in practice.

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