Due diligence is the stage where you check that the business is what the seller says it is. It protects you from overpaying and from inheriting problems. A disciplined checklist keeps emotion out of the decision.
1. Financial due diligence
- Three to five years of profit and loss statements, balance sheets and tax returns
- Reconcile bank statements to reported revenue
- Understand owner add-backs and verify each one
- Check working capital needs and seasonality
- Review all debts and liens
2. Customer and revenue quality
- Revenue by customer: is any one customer too large a share?
- Contract terms and renewal dates
- Churn and repeat purchase rates
- Pipeline and backlog
3. Legal and contracts
- Ownership of key assets, intellectual property and licences
- Leases and whether they transfer
- Outstanding or threatened litigation
- Employment agreements and non-competes
4. Tax
- Filing history and any open audits
- Sales and payroll tax compliance
- The tax effect of an asset purchase versus a share purchase, reviewed with your advisor
5. Operations and people
- Who really runs the business day to day?
- Key-person dependence on the owner
- Staff turnover, culture and compensation
- Suppliers, systems and equipment condition
Common red flags
- Numbers that do not reconcile with bank records
- A seller reluctant to share information
- Heavy reliance on one customer or one employee
- Declining margins with no clear explanation
Frequently asked questions
How long does due diligence take?
It commonly takes several weeks, depending on the size and complexity of the business and how organised the seller is.
Who should help with it?
An accountant, a transaction attorney and, for some deals, an industry specialist.
Also read: how to find off-market businesses and our ETA guide. Learn tactical M&A at Harbour Club.
Educational content only, not legal, tax or financial advice. Work with qualified professionals.
