Business Acquisition Due Diligence Checklist (Free Download)

Due diligence is where a buyer confirms that the business is what the seller and broker described. The LOI sets the price on the assumption that the earnings, customers, contracts, and assets are real and transferable. Diligence tests that assumption, and the purchase agreement then allocates the risk of anything that turns out differently.

This checklist is organized by area. Not every item applies to every business, and a $400,000 owner-operated service company will need less than a $2,000,000 distributor with 30 employees. Use it to build your own request list, then work with your attorney, CPA, and lender on the items they need.

Financial due diligence

Financial diligence carries the most weight because the price is based on earnings. The goal is to rebuild SDE or EBITDA from source documents and confirm that add-backs are real. See how to calculate SDE and how to calculate EBITDA.

• Three years of business tax returns and year-to-date financial statements.
• Monthly profit and loss statements to see seasonality and trends.
• Bank statements to reconcile deposits with reported revenue.
• Documentation for every add-back in the seller’s SDE or EBITDA calculation.
• Accounts receivable and payable aging reports.
• Inventory counts and valuation method, if inventory is included.
• Sales tax, payroll tax, and other tax filings and payment history.
• Capital expenditure history and upcoming equipment needs.
• Debt schedule and any liens on business assets.

Customers and revenue

• Revenue by customer for at least three years; identify concentration.
• Customer contracts, renewal terms, and assignment provisions.
• Churn or retention data for recurring revenue.
• Pipeline, backlog, or booked work, where relevant.
• Pricing history and any recent price changes.
• Online reviews and complaint history.

Legal and corporate

• Entity documents, ownership records, and good standing certificates.
• Leases, including term, renewal options, assignment consent, and personal guarantees.
• Material contracts with suppliers, customers, and partners, and whether they can be assigned.
• Pending or threatened litigation, claims, and regulatory actions.
• Licenses and permits, and whether they transfer to a new owner.
• Intellectual property: trademarks, domains, software licenses.
• Insurance policies and claims history.
• Environmental issues for businesses with property or hazardous materials.

Operations

• The owner’s actual weekly role and the tasks only the owner performs.
• Key processes, documented or not.
• Supplier relationships and concentration.
• Equipment list, condition, and maintenance records.
• Facilities and capacity.
• Quality control and service standards.

Employees

• Organization chart and employee census: roles, tenure, pay, benefits.
• Key employees and how likely they are to stay after the sale.
• Employment agreements, non-competes, and contractor classification.
• Payroll records and benefit plans.
• Licenses or certifications held by employees that the business depends on.
• Any pending HR claims or wage disputes.

Technology and data

• Systems used for accounting, scheduling, CRM, and operations; who owns the accounts.
• Software licenses and whether they transfer.
• Website, domain, and social media ownership and access.
• Customer data handling and any privacy obligations.
• Cybersecurity practices and history of incidents.

Financing and transaction

• Lender requirements and conditions, including a business valuation and any quality of earnings review.
• Documentation of your equity injection source. See SBA down payment requirements.
• Seller note terms aligned across the LOI, purchase agreement, and note. See seller financing agreements.
• Purchase price allocation for tax reporting.
• Working capital target and adjustment mechanics.
• Transition plan and seller consulting terms.
• Insurance and licenses in place for day one.

Common red flags

Using findings in negotiation

1. Quantify the issue: lower earnings, a one-time cost, or an ongoing risk.
2. Decide whether it calls for a price change, a holdback or escrow, an indemnity, a seller note adjustment, or walking away.
3. Put the outcome in the purchase agreement, not just in an email.

Who helps with which items

Before you get to diligence

Sellers and brokers give more access, and more time, to buyers who look able to close. Present your criteria, background, and financing approach in a free BuyerPass profile, and read our SBA LOI guide to set a realistic diligence period.

A typical due diligence sequence

Due diligence usually runs during the exclusivity period granted by the LOI. Timing varies with deal size and complexity, but the order of work is fairly consistent. Front-load the items most likely to change the price or kill the deal.

Who does what

Red flags that deserve a pause

• Add-backs that cannot be documented with invoices, payroll records, or statements.
• Revenue in the financial statements that does not match tax returns or bank deposits.
• A single customer providing a large share of revenue with no written contract.
• A lease that expires soon or cannot be assigned without landlord consent.
• Key employees who are unaware of the sale or unlikely to stay.
• Declining revenue in recent months that the seller explains only as temporary.
• Seller reluctance to provide documents that were promised in the LOI.

A red flag is not automatically a reason to walk away. It is a reason to get more information, adjust the price or structure, or add protections in the purchase agreement. If earnings come in lower than represented, revisit the valuation using our guide to business valuation multiples.

Frequently asked questions

How long does due diligence take for a small business?

It depends on the size of the deal, the quality of the records, and the financing. Many LOIs set a period in the range of 30 to 90 days, and financed deals often need time for the lender's review. Negotiate a period that reflects the work, not an optimistic guess.

Do I need a quality of earnings report?

For larger deals and many financed transactions, a quality of earnings review is common and lenders may require one. For smaller deals, a CPA review of the add-backs and a reconciliation to tax returns may be enough. Ask your lender early.

What should I verify about the seller's numbers first?

Start with the earnings figure used in the price. Understand how SDE is calculated and test each add-back. A small change in earnings can move the price by a multiple of that amount.

Is the checklist available as a download?

Yes. The checklist download above is a fillable PDF you can track in any PDF reader or share with advisors.