The Business Buyer's Due Diligence Checklist

Financial

Items 1 to 6 · The money tells the real story

1

Critical

Request 3 years of tax returns, not just P&Ls

Tax returns are filed under penalty of perjury. P&Ls are prepared by the seller and easy to manipulate. If the seller refuses, walk away. Full stop.

2

Critical

Have an accountant independently verify the SDE

Seller Discretionary Earnings is the most important number in the deal, and sellers routinely inflate it. Add-backs need to be legitimate, recurring, and defensible. Hire a CPA to check the math before you make an offer.

3

Often Missed

Check revenue concentration

What percentage of revenue comes from the top 3 customers? If one customer represents more than 20% of revenue and they leave after the sale, you're in trouble. Ask for a full customer list with revenue breakdown.

4

Often Missed

Review accounts receivable aging

How much of the AR is 60+ days old? 90+ days? Old receivables are often uncollectable and inflate the apparent health of the business. Don't pay for money that will never arrive.

5

Verify recurring vs. one-time revenue

Recurring revenue (subscriptions, contracts, retainers) is worth far more than one-time revenue. Ask for the exact split. A business that looks like $600k/year in revenue might only have $150k of it under contract.

6

Check for any outstanding debts, loans, or liens on assets

Run a UCC lien search on the business and its assets. You don't want to buy equipment that a lender has a claim on. Your attorney can do this search quickly and cheaply.

Operations

Items 7 to 12 · What actually runs the business day-to-day

7

Critical

Identify every key-person dependency

If the owner leaves and three customers follow them, or the head technician quits and no one else can do the work, the business you bought is not the business you thought you bought. Map every relationship that depends on a specific person.

8

Critical

Negotiate 90 days of seller training, not 30

Every listing says "seller will train for 30 days." That's almost never enough. Push for 90 days as a condition of closing. A seller who refuses to stay 90 days is telling you something about how hard the transition will be.

9

Review employee contracts, roles, and tenure

Who are the key employees? How long have they been there? Do they have written contracts? Non-competes? Will they stay after the sale? Talk to them if the seller allows it. Their body language tells you a lot.

10

Inspect all equipment for age, condition, and upcoming replacements

Get a full list of equipment included in the sale. For each major item: when was it purchased, what is its current condition, when does it need to be replaced? A $500k business with a truck fleet due for replacement in Year 1 is not worth $500k.

11

Often Missed

Verify all licenses and permits are transferable

Some business licenses are tied to the individual owner, not the business entity. If a license doesn't transfer, you may not be able to operate legally from Day 1. Check with the relevant licensing authority before you close.

12

Review supplier and vendor contracts

Are favorable supplier terms tied to the current owner's relationship? Will pricing change after the sale? Get a list of all vendors and confirm which contracts transfer and at what terms.

Legal

Items 13 to 17 · The hidden liabilities that kill deals after closing

13

Critical

Search for pending or threatened litigation

Ask the seller directly and in writing if there is any pending, threatened, or anticipated litigation. Then verify independently with a court records search. Lawsuits don't disappear at closing. They transfer with the business.

14

Critical

Review the lease: terms, renewal options, rent escalation

If real estate is not included in the sale, you will be a tenant. What are the remaining lease terms? What does renewal look like? Is there a rent escalation clause? Can the landlord refuse to transfer the lease? A bad lease can make a profitable business unprofitable overnight.

15

Verify ownership of all intellectual property

Who owns the domain name? The trademark? The software? The customer list? These should all be assets of the business entity you're buying, not personally owned by the seller. Confirm this in writing.

16

Often Missed

Check for franchise agreements or territorial restrictions

Some businesses operate under franchise agreements or distributor agreements that restrict what you can sell, where, or how. These may also require franchisor approval of the sale. Read every contract.

17

Require a seller non-compete agreement

If the seller can open a competing business across the street the day after closing, your customer relationships may follow them. A non-compete (typically 2–5 years, local geography) is standard and should be non-negotiable.

Market & Customers

Items 18 to 21 · Is the business actually growing, or slowly dying?

18

Critical

Understand why the seller is really selling

"Retiring" and "health reasons" are the two most common answers, and sometimes true. But declining revenue, a new competitor, an expiring lease, a key employee who just quit, or an industry about to be disrupted are also real reasons. Dig until you're satisfied you understand the real motivation.

19

Research the competitive landscape

Who are the competitors? Are any new entrants coming into the market? Is the industry growing or contracting? Is the business's revenue trending up or down over the last 3 years? A business in a declining industry at peak revenue is a trap.

20

Often Missed

Check online reputation independently

Google reviews, Yelp, BBB complaints, Glassdoor (for employee sentiment), and social media. Don't rely on what the seller shows you. Search yourself. One pattern of bad reviews can tell you more than three years of financials.

21

Verify customer contract transferability

Do the major customers have written contracts with the business? Do those contracts allow assignment to a new owner, or do they include change-of-control clauses that let the customer walk? Talk to the top 2–3 customers if the seller allows it.

Deal Structure

Items 22 to 25 · Protect yourself before you sign anything

22

Ask about seller financing, every time

Even if the listing doesn't mention it, always ask. Retiring sellers especially often prefer steady monthly income over a lump sum. A seller who carries 20–30% of the note has skin in the game. They want you to succeed. Script: "Would you consider carrying part of the note at a reasonable rate? It would help me move faster."

23

Often Missed

Consider an earnout tied to Year 1 performance

If the SDE seems aggressive, offer to pay a portion of the purchase price only if Year 1 revenue hits a specific target. This protects you if the financials were inflated and aligns the seller's incentive to support a clean transition. Typical earnout: 10–20% of purchase price tied to 12-month revenue.

24

Get written representations and warranties from the seller

The seller should put in writing that: the financials are accurate, there is no undisclosed litigation, all licenses are valid, and no material facts have been withheld. If any of these turn out to be false after closing, you have legal recourse. Your attorney will handle this. Don't skip it.

25

Critical

Hold back 10–15% of the purchase price in escrow

A holdback protects you if undisclosed liabilities surface in the months after closing. Structure the holdback to be released 6–12 months post-close if no issues arise. Sellers who refuse a holdback are telling you something.

The Business Buyer'sDue Diligence Checklist

Score any listing against this checklist —in 60 seconds.

The Business Buyer's
Due Diligence Checklist

Score any listing against this checklist —
in 60 seconds.