Due Diligence Checklist for Buying a Small Business

A practical due diligence checklist for buyers evaluating a small business acquisition -- financial, legal, operational, and customer items to verify before closing.

Due diligence is where the deal either holds up or falls apart. It's the buyer's opportunity to verify everything the seller has represented -- financially, legally, and operationally -- before money changes hands. This checklist covers the major categories most small business acquisitions should cover, though your attorney and accountant should tailor it to your specific deal.

Financial due diligence

Request at least three years of financial statements and tax returns, bank statements, accounts receivable and payable aging reports, and any existing debt schedules. Compare tax returns to internal financials -- meaningful, unexplained gaps deserve a closer look. Verify the add-backs used to calculate SDE or EBITDA with supporting documentation rather than taking them at face value.

Legal and compliance due diligence

Review business licenses and permits, any pending or past litigation, regulatory compliance history, and the corporate structure and ownership documents. Confirm the business is in good standing in its state and that there are no undisclosed liens, judgments, or liabilities that could transfer with the business.

Contracts and leases

Review the lease (and whether it's assignable or will need to be renegotiated), key customer and supplier contracts, any equipment financing or leases, franchise agreements if applicable, and non-compete or exclusivity clauses that could affect the business going forward.

Customer and revenue concentration

Understand how revenue is distributed across the customer base. A business where one or two customers make up a large share of revenue carries more risk -- losing that relationship after the sale could significantly hurt performance. Ask about customer tenure, contract terms, and any recent losses or gains of major accounts.

Employees and key people

Review employee records, compensation, any employment agreements, and benefits obligations. Identify which employees are critical to operations and whether they're likely to stay through a transition. If the owner has deep personal relationships with key customers or employees, plan for how that will transfer -- or whether it can.

Operations and assets

Inspect physical assets and equipment condition, confirm inventory counts and valuation methods, and understand day-to-day operating procedures. Ask what would happen to the business if the current owner disappeared tomorrow -- the more the business depends on one person, the more transition risk there is.

Working with professionals

Due diligence is not a solo project. An experienced M&A attorney should review contracts, corporate documents, and the purchase agreement; a CPA or accountant should review financials and tax matters; and, depending on the industry, specialists (environmental, IT, real estate) may be worth bringing in for specific risks. The cost of professional due diligence is almost always small relative to the cost of missing something material.