Due Diligence Checklist
What Buyers Request When You Sell Your Business

What Due Diligence Means and When It Starts

A signed letter of intent usually starts the full due diligence phase. The buyer and its accountants, lawyers, lenders, and other advisers investigate the company to confirm the information behind the proposed price and terms. Financial and tax reviews run alongside legal, commercial, operational, employee, and technology reviews. Commercial diligence may cover the company’s market, competitors, customers, and revenue outlook.

The buyer typically sends a detailed request list after signing the LOI. You provide documents through a secure data room and answer follow-up questions as each adviser reviews them. The buyer may use its findings to revise the purchase agreement or price, set the working capital target, adjust financing, or request additional indemnities. The LOI often grants the buyer exclusivity during this review period, which limits your ability to negotiate with other buyers.

A quality of earnings report covers one part of financial due diligence. A quality of earnings analysis tests whether reported profit is repeatable and examines adjustments to earnings and working capital. It does not review corporate ownership, contracts, taxes, employee matters, intellectual property, facilities, or other risks covered by the wider diligence process.

Financial Records and Quality of Earnings

Buyers use financial diligence to verify reported earnings, cash needs, debt, and the assumptions behind the price in the letter of intent. Their accountants usually request annual and monthly income statements, balance sheets, and cash flow statements. They also review the general ledger, bank reconciliations, accounts receivable and payable aging reports, debt schedules, budgets, and capital spending records.

Your financial statements, general ledger, and supporting schedules should reconcile with one another and remain consistent with the information provided before the letter of intent. Buyers should be able to trace revenue and expenses to the general ledger without requesting repeated explanations or revised files. Messy books, unexplained journal entries, and material differences between monthly and annual statements create more questions and can extend diligence.

A quality of earnings report forms one part of this financial review. The accountants preparing the report test whether reported profit reflects sustainable operating performance and identify adjustments that may not continue after closing. Buyers will scrutinize adjusted EBITDA add-backs, particularly owner compensation, claimed one-time expenses, and adjustments that annualize a few recent months. Signed contracts or completed cost reductions generally support an adjustment better than an optimistic forecast.

Buyers also use the financial records to establish a working capital peg. The peg sets the normal level of operating assets and liabilities that must remain in the company at closing. Reliable monthly balance sheets support a defensible calculation, while inconsistent classifications or overdue receivables can produce disputes over the final purchase price.

You should prepare schedules that connect every proposed add-back and adjustment to source documents. Source documents help the buyer verify the amount, timing, and rationale for each adjustment. Unsupported run-rate adjustments often receive little or no credit because the buyer cannot verify that recent performance will continue.

Tax Records and Exposure

Tax diligence examines unpaid or unreported obligations, while financial diligence and a quality of earnings review focus mainly on earnings, cash flow, and working capital. Buyers typically request three to five years of federal, state, and local income tax returns. They also request sales and use tax returns, payroll filings, property tax records, unclaimed property filings, audit correspondence, and supporting schedules.

Buyers often focus on nexus, which means a business has enough activity in a state to trigger tax obligations there. Remote employees, sales into multiple states, and drop-shipping arrangements can create filing duties that an owner may not expect. Buyers also look for sales tax collected but not remitted, unreported use tax, unfiled returns, and payroll tax compliance problems, according to this tax diligence checklist.

Your tax records should include filings for every jurisdiction where the company has an obligation, and the reported amounts should reconcile with the company’s financial statements. Known audits, disputes, and filing gaps should come with a clear explanation and an estimated exposure. Buyers may seek an escrow, indemnity, or price adjustment when unresolved liabilities could survive closing.

Multi-jurisdiction tax records often take time to collect. Gather the available filing history before going to market, and ask your tax adviser to identify missing returns or unpaid balances. Doing so can prevent document collection from delaying the buyer’s review. Pre-sale tax preparation guidance also recommends disclosing known issues before buyers find them independently.

Legal and Corporate Documents

A buyer’s legal team reviews corporate records to confirm the company’s ownership, verify that the required parties can approve the transaction, and identify legal obligations that may remain after closing. Common requests include the following documents.

• Formation and governance records cover articles of incorporation or organization, bylaws, amendments, board minutes, and shareholder agreements. Complete, signed records allow counsel to trace major corporate actions without reconstructing them during diligence.
• Ownership records include the capitalization table and stock or membership ledger. Both records should match and account for every owner, option, transfer, and promised equity interest.
• Corporate approvals show who can authorize the sale and which board or shareholder votes the transaction requires. Missing minutes or unclear approval rights can hold up definitive agreements and closing.
• Litigation records cover pending, threatened, and recently resolved disputes. Buyers usually request complaints, settlement agreements, correspondence, and management’s description of potential exposure.
• Insurance records include current policies, coverage limits, and claims history. Buyers compare known risks and past claims with available coverage.

Consistent capitalization records and signed corporate approvals help buyer counsel verify ownership and determine who must authorize the sale. Conflicting cap tables, undocumented equity promises, or undisclosed litigation require investigation and may lead the buyer to seek an escrow holdback or stronger contractual protections. You should identify and explain those issues before the buyer’s counsel finds them.

Customer and Revenue Concentration

Buyers quantify customer concentration because the loss of a large account can reduce revenue and earnings. They measure each major customer’s share of revenue as well as the combined share generated by the largest accounts. A customer that produces a substantial portion of revenue can affect valuation and financing even when the rest of the customer base is diversified.

Higher concentration may reduce the price a buyer will offer or the amount a lender will finance. One customer concentration framework associates a customer representing 25% to 40% of revenue with a 10% to 20% price discount. Under that framework, concentration above 40% may lead a buyer to propose an earnout or escrow tied to customer retention. High concentration may also reduce available financing, which can favor buyers able to contribute more equity. The same framework notes that lenders may reduce loan amounts or decline deals when one account represents 25% to 30% of revenue.

You should prepare customer-level revenue records that show concentration and renewal history over several years. Buyers will compare those records with contracts, termination rights, and the tenure of each major relationship. They may also assess whether the customer relies on your company or on your personal involvement.

Long-term contracts may reduce buyer concern when they limit termination rights or require enough notice for the company to respond to a cancellation. A documented decline in concentration also helps because it shows that new revenue sources are becoming material. Clear disclosure supports a faster review, while incomplete or buried concentration data can weaken confidence once buyers reconcile customer records with the financial statements.

Contracts, Leases, and Change-of-Control Clauses

Buyers review every material customer and supplier agreement, along with property and equipment leases. The review determines whether the transaction requires a counterparty’s consent or advance notice. Buyers also check whether a counterparty can terminate the agreement after a sale.

Deal structure determines which clauses may apply. An asset sale often requires the seller to assign contracts to the buyer. A sale of the company’s equity may trigger a change-of-control clause even though the contracting entity remains unchanged. Some agreements treat either event as a default or give the counterparty a termination right.

Contract timing can conflict with the schedule in the letter of intent. For example, a contract requiring 90 days’ notice cannot satisfy a planned 45-day diligence period without an accommodation. The parties may need to delay closing, obtain an expedited consent, or exclude the contract or related asset. Contract diligence guidance identifies assignment and change-of-control restrictions as major issues because missing required consent can affect the transaction.

The data room should include each signed agreement and all amendments. A contract schedule should identify expiration dates, renewal windows, notice requirements, and the party responsible for granting consent. Missing amendments, expired leases, or undisclosed side agreements slow review because buyers cannot confirm what rights will transfer at closing.

Employees and Benefits

Deal structure determines which employee obligations pass to the buyer. In a stock purchase, the employing entity remains intact and generally retains its employment liabilities and benefit plans. In an asset purchase, the buyer usually selects which employees to hire and which obligations to assume, but successor liability can still apply under certain employment laws.

Buyers typically request an employee census, payroll records, employment agreements, offer letters, and severance arrangements. They also review handbooks, incentive plans, benefit plan documents, retirement plan records, and any union agreements. A structured benefits review checks plan compliance and identifies correction costs that may affect the purchase agreement.

Worker classification and wage practices receive close attention regardless of deal structure. Buyers test whether contractors should have been employees and whether salaried employees qualify for overtime exemptions. They also examine unpaid overtime, leave practices, workplace claims, safety records, and required employment eligibility forms.

Key-person dependency creates a separate operating risk. A buyer will identify employees who control major customer relationships or possess knowledge that nobody else can readily replace. Buyers may seek retention agreements or adjust deal terms when a departure could materially hurt revenue or operations.

Employee records should match payroll data, tax filings, and written agreements. Documented worker classifications and current benefit filings can reduce uncertainty that might otherwise prompt a buyer to seek indemnities or holdbacks. Missing agreements, unresolved wage claims, benefit plan errors, and uncertain retention plans often extend diligence and increase negotiations over who bears the risk.

Intellectual Property and Technology

Buyers need proof that your company owns or has the right to use the intellectual property included in the sale. A complete chain of title connects the company to its intellectual property through employee invention agreements, contractor assignments, or valid licenses. Buyers need documents showing that the company can use and transfer the code and other intellectual property included in the transaction. Missing assignments may require you to contact former employees or contractors and resolve ownership before the deal can proceed.

Buyers also review open-source software for license terms that may restrict proprietary code. Your software inventory should identify each open-source component and its governing license. The inventory should also show how your product uses the component. Some open-source licenses can require source-code disclosure when software is distributed in ways covered by their terms. Buyers will examine how each component is integrated and distributed before assessing its effect on proprietary code.

Technology diligence also covers reliance on outside platforms and infrastructure providers. Buyers will examine whether key agreements can transfer after a sale and whether one vendor could disrupt operations. Platform agreements, service terms, and documented replacement options help buyers assess the cost and difficulty of changing providers.

Ownership gaps and open-source problems can take months to correct. One IP diligence review describes retroactive assignments, license remediation, and trade-secret documentation as issues sellers should address well before going to market. An IP audit belongs on your pre-market checklist because a signed letter of intent leaves little time to repair missing rights.

Facilities and Environmental Review

Facilities and environmental diligence mainly applies to businesses with owned real estate, manufacturing operations, regulated activities, or facilities that require substantial investment. Buyers typically request zoning approvals, occupancy permits, prior environmental reports, and records of major repairs or deferred maintenance.

A Phase I Environmental Site Assessment reviews a property’s history and current use for signs of contamination without physical testing. If the Phase I assessment identifies a potential concern, the buyer may commission a Phase II assessment that collects and analyzes samples to evaluate whether contamination is present. Buyers may also investigate underground storage tanks, asbestos, mold, wetlands, and nearby sources of contamination.

Buyers and lenders conduct environmental review before closing because acquiring contaminated property or certain business liabilities may expose the buyer to cleanup obligations. A late discovery can affect financing, require further testing, or reopen price and indemnity negotiations.

Before diligence begins, assemble current permits, zoning records, environmental reports, and documentation of the facility’s condition. Missing permits, unresolved violations, contamination concerns, or neglected building systems can slow the transaction. Sellers that lease significant facilities should also organize landlord records and confirm who bears responsibility for repairs and environmental obligations under each lease.

How Long Due Diligence Takes and What Extends It

A focused lower-middle-market due diligence review commonly takes four to eight weeks. The broader period between signing the LOI and closing often lasts 60 to 120 days, according to transaction timeline guidance.

Several workstreams move at once during that period. The buyer begins reviewing its initial requests after receiving data room access. Document review and management meetings generally continue over the following weeks. During the same period, lawyers may draft the purchase agreement and disclosure schedules. Lenders, landlords, customers, or regulators may need to approve parts of the transaction before closing.

A disorganized data room often extends diligence because missing records create repeated questions and conflicting answers. Third-party consents and financing contingencies can extend the schedule because they rely on reviews and approvals outside the seller’s control. A newly discovered tax exposure, contract issue, or unexplained financial adjustment may add further investigation and reopen negotiations.

Preparation gives you the most control over timing. You cannot set a buyer’s lender schedule or eliminate every follow-up question, but you can organize records, identify required consents, and prepare explanations before signing the LOI. An organized data room and prompt, consistent responses can prevent routine document requests from causing avoidable delays.

Getting Organized Before You Go to Market

Start building the data room before buyer outreach begins. An organized room gives approved parties one place to review documents and reduces time spent answering requests for missing or outdated files. Buyers can also review a familiar numbered folder structure more efficiently, according to J.P. Morgan’s data room guidance.

Use this pre-market checklist.

1. Create the folder structure. Match the folders to the main diligence categories and maintain an index showing what each folder contains.
2. Review every file. Confirm that agreements are signed, financial records reconcile, and duplicate drafts have been removed. A short internal test can catch broken links, incorrect permissions, and missing files before outside reviewers receive access, as recommended in virtual data room preparation guidance.
3. Identify weak spots early. Document customer concentration, unresolved litigation, missing intellectual property assignments, and inconsistent financial records before buyers begin their review. You should explain known issues with supporting facts and a corrective plan when one exists.
4. Prepare disclosure schedules with counsel. Disclosure schedules list exceptions to the promises a seller makes in the purchase agreement. Proper disclosure helps buyers assess a known risk and can reduce later disputes over information the seller allegedly withheld, as guidance on disclosure schedules explains.
5. Control access in stages. Release standard diligence materials first. Reserve employee information, detailed ownership records, and other sensitive documents for qualified buyers at the appropriate stage. Use view-only permissions, watermarking, or download restrictions when appropriate to limit how recipients handle confidential information.

For Salt Creek clients, we personally manage the data room and coordinate buyer requests throughout diligence. Jack and Connor provide direct oversight so you can give buyers consistent responses while continuing to operate the business.

Get Your Business Ready Before Diligence Starts

Buyers generally focus less on whether a business is flawless than on whether its records are organized and its owners can explain known issues candidly and promptly. Early preparation gives you time to correct missing documents and explain weaknesses before a buyer draws its own conclusions.