Due Diligence Checklist

What is Due Diligence?

Due diligence is the comprehensive investigation of a business before finalizing a purchase. It's your opportunity to verify everything the seller has told you and uncover any potential issues that could affect the value or viability of the business.

⚠️ Important

Never skip due diligence, even if you trust the seller. This process protects your investment and can save you from financial disaster.

Financial Due Diligence

Financial Statements Review

3-5 years of profit & loss statements
Balance sheets
Cash flow statements
Tax returns (personal and business)
Bank statements
Accounts receivable aging reports
Accounts payable

Revenue Verification

Sales records and invoices
Customer contracts and agreements
Revenue concentration analysis
Seasonal patterns and trends
Payment terms and collection history

Expenses Analysis

Operating expense breakdown
Fixed vs. variable costs
Owner discretionary expenses
Vendor contracts and pricing
Rent or lease agreements

Legal Due Diligence

Business Structure & Ownership

Articles of incorporation/organization
Operating agreements or bylaws
Stock certificates and cap table
Partnership agreements
Shareholder records

Contracts & Agreements

Customer contracts (assignability clause)
Supplier and vendor agreements
Lease agreements (real estate and equipment)
Employment contracts
Non-compete agreements
Franchise agreements (if applicable)
Partnership or joint venture agreements

Intellectual Property

Trademarks and service marks
Patents and pending applications
Copyrights
Domain names and websites
Trade secrets and proprietary processes
Licensing agreements

Licenses & Permits

Business licenses
Professional certifications
Health and safety permits
Zoning compliance
Environmental permits
Industry-specific licenses

Litigation & Compliance

Pending or past lawsuits
Regulatory compliance issues
Insurance claims history
Tax disputes or liens
OSHA violations
Environmental liabilities

Operational Due Diligence

Customers

Top customer list and revenue contribution
Customer retention rates
Customer satisfaction surveys/reviews
Customer acquisition cost
Lifetime customer value

Suppliers & Vendors

Key supplier relationships
Supply chain dependencies
Pricing agreements and terms
Alternative supplier options
Inventory management practices

Employees

Organization chart
Employee roster with compensation
Key employee retention plans
Employment contracts
Benefits and retirement plans
Worker's compensation claims
Turnover rates and reasons
Union agreements (if applicable)

Operations & Systems

Standard operating procedures
Technology infrastructure
Software licenses and subscriptions
Equipment condition and maintenance
Facility condition assessment
Inventory valuation and turnover

Market & Competitive Analysis

Industry trends and outlook
Competitive landscape
Market share and positioning
Growth opportunities and threats
Barriers to entry
Technological disruption risks

Real Estate (if included)

Property title search
Survey and boundary verification
Environmental assessment (Phase I & II)
Building inspections
Zoning compliance
Property tax assessment
Utility agreements

Insurance Review

Current insurance policies
Coverage adequacy
Claims history
Premium costs
Transferability of policies

Red Flags to Watch For

Reluctance to provide information
Inconsistent financial records
Undisclosed liabilities
Pending lawsuits
Key customer or employee departures
Declining sales trends
Deferred maintenance
Regulatory violations
Excessive owner involvement

Professional Advisors

Engage qualified professionals to assist with due diligence:

CPA: Financial statement review and tax analysis
Attorney: Legal documents and contracts review
Business Broker/Advisor: Overall guidance and negotiation
Industry Expert: Operational and market assessment
Environmental Consultant: Property assessment (if applicable)

Timeline

Typical due diligence periods range from 30-90 days depending on business complexity. Larger transactions may require more time.