Due diligence checklist for buying a business
Due diligence is the buyer's structured investigation of a company between signing a letter of intent and closing, to confirm the financials, customers, operations, legal standing and people are what the seller said.
Key takeaways
- Start with the numbers: verify earnings against tax returns, bank statements and monthly financials.
- Check customer concentration and how long key customers have stayed.
- Legal, tax, insurance and employment items surprise buyers most often.
- Findings should feed price and deal terms, not just a go or no-go decision.
Financial diligence
Reconcile reported earnings to tax returns and bank deposits for several years, and test every add-back the seller claims. Many buyers commission a quality-of-earnings review on larger deals. Look at working capital needs, seasonality and whether the owner takes cash outside the books.
Customers, operations and people
Find out how much revenue comes from the top customers and whether contracts transfer in a sale. Walk the operation: equipment condition, systems, suppliers and anything that depends on the owner personally. Meet key employees, and ask who could leave once the owner does.
Legal, tax and insurance
Confirm licences, permits, leases, pending disputes, tax filings and insurance coverage. Your attorney and accountant should review these. Whether you buy assets or stock changes which liabilities you inherit.
Frequently asked questions
It depends on size and complexity. Smaller deals often take a few weeks, while larger or more complex ones can take a few months. The exclusivity period in the letter of intent usually sets the window.
Numbers that don't reconcile. If reported earnings can't be matched to tax returns and bank records, every other claim from the seller deserves extra scrutiny.
Last reviewed . General information, not legal, tax or financial advice.