What Buyers Look For: Due Diligence for a Small Business Sale
When someone considers buying a business, they examine it closely. Knowing what due diligence covers helps owners prepare, whether a sale is next year or a decade away.
Due diligence is the investigation a buyer conducts before completing the purchase of a business. It is how the buyer confirms that what the seller has described is accurate and identifies risks that might affect the price or the deal. For owners, the process can feel invasive. It is also predictable. Understanding what buyers typically examine lets you prepare long before a sale is on the table. This overview is general; an M&A attorney and accountant should guide any actual transaction.
Financial diligence
Buyers usually start with the numbers. Expect requests for:
- Several years of financial statements and tax returns.
- Monthly results for the current year.
- Accounts receivable and payable aging reports.
- Details of debt, leases and other obligations.
- Explanations for unusual swings in revenue or expenses.
- Adjustments for owner-specific expenses that would not continue under new ownership.
Buyers often look closely at the quality of earnings, meaning whether profits are recurring and sustainable or boosted by one-time events.
Customers and revenue
A buyer wants to know how dependable future revenue is. They will ask how concentrated revenue is among top customers, how long customers stay, whether key relationships rely on the owner personally and whether important contracts can be transferred to a new owner. Heavy dependence on one customer or on the owner’s personal relationships is a common concern, and buyers may respond with a lower price, an earnout tied to future results or a request that the owner stay on for a transition period.
Legal and contracts
Legal diligence typically reviews:
- Formation documents, ownership records and minutes.
- Major contracts with customers, suppliers and landlords, including change-of-control clauses.
- Intellectual property, such as trademarks, domain names and software, and whether the company actually owns it.
- Any pending or past litigation.
- Licenses and permits needed to operate.
- Compliance with privacy, employment and industry-specific rules.
People and operations
Buyers examine the team and how the business runs day to day. They may review an employee list with roles and compensation, employment agreements, benefits plans and whether workers are properly classified. They will also look at documented processes, key systems and whether the business can operate without the current owner’s constant involvement.
How to prepare now
The businesses that move through due diligence smoothly are usually the ones that have been organized all along. Steps worth taking well ahead of any sale include:
- Keeping clean, reconciled books, ideally reviewed by an outside accountant.
- Maintaining an organized minute book and up-to-date ownership records.
- Putting important customer and supplier relationships into written contracts.
- Documenting key processes so the business does not live only in your head.
- Confirming the company owns its intellectual property.
- Addressing known problems before a buyer finds them.
Even if you never sell, these habits make the business easier to run, finance and hand off to the next generation of leaders.
