Due diligence is the process of verifying that what the seller has represented about the business is accurate — and identifying risks the seller hasn't disclosed. Most acquisition failures — deals that close and then underperform — are the result of due diligence that was either insufficient or focused on the wrong things.
Financial Due Diligence
- 3 years of business tax returns — compare against seller-provided P&Ls
- 3 years of P&L statements (monthly detail for most recent year)
- 3 years of balance sheets
- Most recent interim P&L within 90 days of closing
- Bank statements for past 12-24 months — verify revenue deposits against reported revenue
- Credit card processing statements — verify reported card revenue
- Complete list of all seller add-backs with documentation for each
- Revenue by customer — concentration analysis
- Revenue trend by month for past 36 months
Legal Due Diligence
- Business formation documents — articles of incorporation, operating agreement
- All material contracts — vendor, customer, employment, partnership
- Lease — full document including all amendments and assignments
- Intellectual property — trademarks, patents, trade names, domain names
- All licenses and permits required for the business to operate
- Pending or threatened litigation — require seller representation and warranty
- UCC filings — check for liens on business assets
- Franchise agreements if applicable, including transfer provisions
Operational Due Diligence
- Organizational chart — who does what, compensation, tenure, replacement risk
- Key employee discussions — retention plans and transition expectations
- Vendor relationships — contracts, pricing, exclusivity arrangements
- Inventory — physical count and valuation if included in the transaction
- Equipment — age, condition, maintenance history, replacement timeline
- Technology systems — POS, accounting software, CRM — transfer requirements
- Insurance history — claims history, current coverage, gaps
Risk Assessment
- Owner dependency — what revenue or relationships leave with the current owner
- Customer concentration — top 3 customers as percentage of total revenue
- Lease risk — term, renewal options, transfer provisions, rent escalations
- Regulatory risk — pending changes that could affect the business
- Competition — new entrants, market share trends
- Geographic risk — economic health of the local market
SBA-Specific Due Diligence
- Business type eligibility confirmation
- Tax return alignment with loan amount requirements
- Collateral assessment — what assets are available to pledge
- Buyer financial profile — personal tax returns, personal financial statement
- Equity injection source documentation
- Environmental assessment if real estate is included
Frequently Asked Questions
30-60 days for most small business acquisitions. Complex businesses may require 90 days. The LOI should specify a due diligence period that gives you enough time to do this properly — not the minimum period a motivated seller will accept.
You have four options: renegotiate the price, require specific representations and warranties, require the seller to remediate the issue before close, or walk away. The LOI should specify a due diligence contingency that allows the buyer to terminate without penalty if due diligence reveals material issues.
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