Due Diligence Checklist Before Buying a Business
Due diligence is where you find out whether the business you plan to buy is what the seller says it is. This checklist breaks the work into six areas: financial, legal, operational, customers, staff and tax. Use it alongside professional advisers, because this is general information, not legal, tax or financial advice.
Key takeaways
- Due diligence tests the seller's claims against evidence: bank records, tax returns, contracts and conversations.
- Cover six areas: financial, legal, operational, customers, staff and tax.
- Whether you buy assets or shares changes which liabilities come with the business, so check the structure early.
- Use an accountant and a lawyer, and write every finding down. Problems you find can change the price or the terms.
By the time you reach due diligence, you have usually agreed a price in principle, often in a letter of intent, and you have a limited period to investigate. That period goes fast. A structured checklist helps you request the right documents in one go, follow up quickly and avoid missing an area entirely.
The depth of your review should match the size and complexity of the deal. A small one-person business needs a lighter review than a company with staff, leases and many contracts, but every area below deserves at least a few questions.
Pro tip
Send the seller one organized document request list at the start, grouped by the six areas below, and set up a shared folder with matching subfolders. It saves time on both sides and makes gaps obvious.
Check the structure first: assets or shares
Before you dive into the details, confirm how the deal is structured, because it affects what you need to check.
| Structure | What you buy | Due diligence focus |
|---|---|---|
| Asset purchase | Selected assets, such as equipment, stock, customer lists and goodwill | Ownership of each asset, transfer of contracts and licenses, which liabilities stay with the seller |
| Share or stock purchase | The company itself, with its history | All past and present liabilities, including tax, disputes and contracts |
The two structures also differ in how they are taxed for buyer and seller. Ask your accountant and lawyer to explain the effect for your deal and your country.
Financial due diligence
The goal is to confirm that the revenue and profit you are paying for are real, repeatable and correctly reported.
- Profit and loss statements and balance sheets for at least the last three years, plus the current year to date
- Business tax returns for the same years, compared line by line with the accounts
- Bank statements to confirm that reported revenue actually arrived
- Monthly revenue and gross margin trends, including seasonality
- A list of all adjustments, or add-backs, the seller has made to profit, with evidence for each
- Accounts receivable aging, showing how old unpaid customer invoices are
- Accounts payable and any overdue supplier bills
- All debts, loans, leases, credit lines and personal guarantees
- Inventory counts, valuation method and any obsolete or damaged stock
- Capital expenditure history and equipment that will need replacing soon
- Working capital needed to run the business month to month
Common mistake
Accepting add-backs without evidence. Sellers often adjust profit by adding back the owner's personal expenses or one-off costs. Some are legitimate. Others are regular costs that you will still have to pay, such as a manager's salary to replace the owner's work. Ask for proof and decide which add-backs you accept.
Legal due diligence
Legal checks look for obligations, restrictions and disputes that could cost you money or stop the business from operating. A lawyer should lead this area.
- Company registration documents, ownership records and good standing with the registry
- Premises lease: length, rent reviews, renewal rights and whether it can be assigned to you
- Key contracts with customers, suppliers and partners, especially change of control or assignment clauses
- Business licenses and permits, and whether they transfer to a new owner
- Intellectual property: trademarks, domain names, website, software and content ownership
- Current, past and threatened lawsuits, claims or complaints
- Regulatory inspections, warnings or fines
- Insurance policies and claims history
- Data protection practices and how customer data was collected
- Liens or security interests registered against business assets
Operational due diligence
Operational checks show you how the business really works day to day and how much depends on the current owner.
- A walk-through of daily operations, ideally on several days, including busy periods
- Written processes, or how much knowledge exists only in the owner's head
- Key suppliers, terms, and whether there are alternatives if one fails
- Condition and maintenance records of equipment and vehicles
- Software, systems and accounts, and whether they can be transferred
- Premises condition, and any repairs you would be responsible for
- Health, safety and environmental compliance relevant to the industry
- How the owner spends a typical week and which tasks you would take over
Spend real time on site if you can. Watching how orders arrive, how problems are handled and how staff talk to customers tells you things no document will. Ask the owner to walk you through a typical problem, such as a late supplier delivery or an unhappy customer, and note who solves it. If the answer is always the owner, plan how you will replace that knowledge, and consider asking for a longer handover period in the purchase agreement.
Customer due diligence
Customers are usually the main source of value in a small business. You want to know who they are, why they buy and whether they will stay after the owner leaves.
- Revenue by customer for the last few years, to spot concentration
- Customer retention and churn, and the reasons customers leave
- Contracts, recurring agreements and their renewal dates
- Pricing history and any recent increases or discounts
- Online reviews, complaints and refund levels
- Sales pipeline and how new customers are found
- Whether key relationships depend personally on the seller
Example
Imagine a buyer reviewing a small IT support firm. The accounts look healthy, but a revenue-by-customer report shows that one client provides almost half of all income, and its contract can be ended at short notice. The buyer does not walk away. Instead, she asks to meet the client before completion and negotiates part of the price as an earn-out that depends on the client staying for the first year.
Staff due diligence
Employees carry knowledge, relationships and skills. They can also come with obligations. Employment law differs significantly between countries and states, so take local advice.
- Staff list with roles, length of service, pay, benefits and contract types
- Employment contracts, handbooks and policies
- Key people the business depends on, and whether they plan to stay
- Contractors and whether they are correctly classified
- Holiday, pension, bonus and other obligations owed to staff
- Past or current disputes, grievances or claims
- Rules on transferring staff to a new owner. In the UK, for example, TUPE rules generally protect employees when a business transfers.
Tax due diligence
Unpaid taxes can follow the business, especially in a share purchase. Your accountant should review this area in detail.
- Filed income or corporation tax returns and evidence they were paid
- Sales tax or VAT registrations, returns and payments. In the UK, check whether the business is above the £90,000 VAT registration threshold and registered correctly.
- Payroll taxes and employee withholding
- Any open tax inquiries, audits or disputes
- How the deal structure affects your tax position and the seller's
Also ask whether any tax filings are late or estimated, and whether the business has used any tax reliefs or schemes that could be withdrawn after a change of ownership. Your lawyer can then ask for specific tax warranties or an indemnity in the purchase agreement to cover anything that relates to the period before you took over.
Turn findings into decisions
Due diligence rarely produces a perfect result. The question is whether the issues you find are acceptable, fixable or deal breakers.
- List every finding. Record the issue, the evidence and its likely impact.
- Rate each issue. Minor, needs action, or serious enough to change the deal.
- Discuss with advisers. Ask your lawyer and accountant how each issue can be handled.
- Adjust the terms. Common responses include a lower price, an earn-out, seller financing, a holdback of part of the price, specific warranties or indemnities.
- Be willing to walk away. If key claims cannot be verified, it is better to lose your costs so far than to buy a problem.
Your due diligence action plan
- Confirm whether the deal is an asset or share purchase
- Appoint an accountant and a lawyer experienced in business sales
- Send one document request list grouped by the six areas
- Compare accounts, tax returns and bank statements
- Review the lease, key contracts and licenses for transfer issues
- Check customer concentration and meet key customers if possible
- Review staff contracts and obligations with local advice
- Record all findings and decide how to address each one
Frequently asked questions
How long does due diligence take?
It depends on the size of the business and how organized the seller is. Small deals may take a few weeks, while more complex ones can take months. The period is usually set in the letter of intent and can sometimes be extended.
Can I do due diligence without an accountant or lawyer?
You can do a lot of the groundwork yourself, but professional advisers spot issues that buyers often miss, especially in tax, contracts and employment. The cost is usually small compared with the risk of a bad purchase.
What if the seller will not share documents?
Some reluctance is normal before an NDA is signed. After that, refusing to share basic financial or legal documents is a serious warning sign. You cannot verify what you cannot see.
Is due diligence the same for a franchise resale?
Most of the checklist applies, plus a review of the franchise agreement, transfer rules, fees and the franchisor's approval process.
Related reading
The bottom line
A thorough due diligence review protects you from paying for profit that is not there or inheriting problems you did not expect. Work through the financial, legal, operational, customer, staff and tax checklists, verify every major claim and use your findings to shape the price and terms. Rules on tax, employment and business transfers vary and change, so rely on qualified advisers and official sources such as GOV.UK and HMRC or your national and state agencies.
