Due diligence is a structured verification of a business before you close, confirming the financials, examining customers and revenue quality, checking legal and tax standing, reviewing contracts and the lease, and assessing operations and staff. It usually happens after a signed letter of intent and before closing, and it exists to confirm the business is exactly what the seller says it is.
The five areas to verify
| Area | What you review |
|---|---|
| Financial | 3 yrs tax returns & statements, bank records, a QoE |
| Commercial | Customer concentration, revenue quality, pipeline, competition |
| Legal | Entity docs, litigation, liens, licenses, IP |
| Contracts & lease | Key contracts, supplier terms, the lease and assignment |
| Operations & people | Systems, staff, owner dependence, equipment condition |
How the process runs
- Sign an LOI, sets price, terms, and an exclusivity/diligence window.
- Send a request list, a document checklist so the seller can start gathering.
- Verify the money first, reconcile statements to tax returns; commission a QoE.
- Work outward, customers, legal, contracts, operations.
- Re-trade if needed, adjust price or terms for what you find, or walk.
For a small-business deal, diligence usually runs 30 to 60 days, often alongside SBA underwriting. Use the full due diligence checklist and study the red flags to know what to escalate.
The red flags that end deals
Financials that don't reconcile to tax returns, heavy customer concentration, declining or one-time revenue, undisclosed liabilities or lawsuits, a lease that can't be assigned, and a business that runs entirely on the owner. Each should be priced in or resolved before closing.
Frequently asked questions
Verify the financials (returns, statements, a QoE), examine customers and revenue quality, check legal and tax standing, review contracts and the lease, and assess operations, after an LOI, before closing.
Usually 30 to 60 days for a small business, often overlapping SBA underwriting. Complex or messy businesses take longer; a clear checklist keeps it on track.
Financials that don't reconcile, customer concentration, declining revenue, undisclosed liabilities, an unassignable lease, and total owner dependence.
