Due diligence questions to ask before buying a business

What diligence is for

Diligence confirms that the business you agreed to buy in the letter of intent is the business you will own after closing. It tests the seller’s representations against records, and it identifies risks that should change the price, the structure, or the decision.

Agree the scope and timetable in the letter of intent, keep a written request list, and record each answer with the document that supports it.

Earnings and financial records

Reconcile what the seller reports with what the bank and the tax authorities saw. Adjusted earnings are only as reliable as the evidence behind each adjustment.

• Do tax returns, bank statements, and financial statements agree for the last three years?
• Which add-backs make up adjusted earnings, and what documents support each one?
• Is revenue growing, flat, or declining by month, not just by year?
• What working capital does the business need, and what is included at closing?
• Are there debts, liens, or unpaid taxes that must be cleared before or at closing?

Customers and revenue quality

Recurring, diversified revenue is worth more than the same amount concentrated in a few relationships. Find out how much of the revenue would survive a change of owner.

• What share of revenue comes from the largest five customers or locations?
• Which revenue is contracted, which is recurring by habit, and which is one-off?
• How many customers were lost in the last two years, and why?
• Do any customer relationships depend personally on the current owner?

Contracts, leases, and transferability

Many small-business assets are only as good as the agreements behind them. Read every material contract for assignment and change-of-control terms.

• Which contracts, leases, and licenses need third-party consent to transfer?
• For ATM routes: are placement agreements written, how long do they run, and can the location owner terminate them?
• For merchant portfolios: does the processor permit the residual stream to be sold, and are there clawbacks or reserve requirements?
• Are there non-compete, exclusivity, or termination clauses that bind the buyer?

Operations and people

Understand what it takes to run the business day to day, and who does it.

• Which tasks does the owner perform personally, and who will perform them after closing?
• Are key employees likely to stay, and are any under agreements?
• What is the age and condition of equipment, and what replacement spending is due?
• Which suppliers, processors, or service vendors would be costly to replace?

Legal, regulatory, and transition

Ask counsel to review litigation, compliance, and licensing, and plan the handover before signing the definitive agreement.

• Is there pending or threatened litigation, or a history of regulatory complaints?
• Are required licenses, registrations, and insurance current and transferable?
• How long will the seller support the transition, and on what terms?
• Which representations, warranties, and holdbacks will protect you if something was missed?