Due diligence is your chance to confirm that the business you are buying is the business you were sold. Done well, it protects you from expensive surprises and gives you the confidence to close. Done poorly, it is where good deals quietly turn into bad ones. Here is what to verify before you sign.
- Verify the earnings independently — reconcile financials to bank statements and tax returns.
- Confirm leases, key contracts, and licenses transfer to you.
- Look hard at customer concentration and the real reason for sale.
- Build a team: a CPA for the numbers, an attorney for the contracts, a broker to coordinate.
- Most diligence runs 30–60 days after the Letter of Intent.
Financial due diligence
This is the core. You are confirming that the cash flow you are paying for is real, repeatable, and accurately represented.
- Three years of financial statements and tax returns, reconciled to bank statements.
- Verification of every add-back used to justify the asking price.
- Accounts receivable aging, accounts payable, and any debt to be assumed.
- Monthly trends — is the business growing, flat, or quietly declining right now?
- Customer-level revenue, to measure concentration risk.
Legal and corporate due diligence
- Corporate records, ownership, and any past or pending litigation.
- The lease — terms, remaining length, and whether it transfers or needs landlord consent.
- Key customer and supplier contracts and whether they are assignable.
- Licenses, permits, and regulatory compliance, and their transferability.
- Intellectual property, trademarks, and any franchise agreements.
Operational due diligence
Look past the spreadsheets at how the business actually runs day to day. Who are the key employees, and will they stay after the sale? How dependent is the business on the current owner's personal relationships? What systems, software, and equipment does it rely on, and what condition are they in? The answers tell you whether the cash flow is durable under new ownership — or whether it walks out the door with the seller.
Commercial due diligence
Step back and assess the business in its market. Is the industry growing or shrinking? Who are the competitors, and what is this business's real advantage? Is the customer base loyal and diversified, or concentrated and at risk? Commercial diligence is how you separate a business with a durable future from one that has peaked.
The biggest red flags
- Books that do not reconcile, or earnings that cannot be independently verified.
- Heavy customer concentration — one client as a large share of revenue.
- Unverifiable or aggressive add-backs.
- Expiring leases or key contracts, or contracts that do not transfer.
- A reason for sale that does not add up, or a seller reluctant to share information.
Build your diligence team
Do not go it alone. A CPA verifies the numbers and tests the add-backs, an attorney reviews the contracts and the purchase agreement, and your broker coordinates the information flow and keeps the deal moving. The cost of good advisors is small next to the cost of a bad acquisition — this is not where to economize.
Turning diligence into a confident close
Diligence is not just defense; it is preparation for ownership. The questions you ask now become your operating knowledge on day one: who the key customers are, how the systems work, where the risks live. Approach it thoroughly, and you close with confidence instead of crossed fingers.
Frequently asked questions
How long does due diligence take?
For most lower-middle-market deals, diligence runs roughly 30 to 60 days after a Letter of Intent is signed, depending on the complexity of the business and how organized the seller's records are.
What are the biggest due-diligence red flags?
Books that do not reconcile, heavy customer concentration, unverifiable add-backs, expiring leases or contracts, and a reason for sale that does not add up. Any of these warrants a closer look before proceeding.
Can I do due diligence myself?
You can lead it, but you should not do it alone. A CPA and an attorney catch issues most buyers miss, and a broker keeps the process organized and on schedule. Their cost is minor versus the risk.
What happens if diligence uncovers a problem?
It depends on the problem. Minor issues are often renegotiated into the price or terms; serious, undisclosed problems can justify walking away. The exclusivity period in your LOI gives you the time and standing to decide.
This article is general information, not legal, tax, or financial advice. Every business and transaction is different — consult your attorney and CPA about your specific situation.