The Due Diligence Checklist: 25 Things Every Buyer Will Scrutinize in Your Business

Opening:

You’ve received a Letter of Intent (LOI) to acquire your business. The valuation is strong, the initial conversations have gone well, and the finish line feels close. But now comes the most critical and intense phase of any M&A deal: Due Diligence.

This is where the buyer puts your company under a microscope to verify that it is everything you've claimed it to be. A smooth diligence process builds trust and closes deals. A messy, disorganized one can kill a deal, or worse, lead to a last-minute price reduction.

This checklist outlines the 25 essential items that buyers will scrutinize. Use it to prepare, avoid surprises, and maintain momentum toward a successful exit.

TL;DR: Key Takeaways

Diligence is about verification, not investigation. The buyer wants to confirm the facts and identify any hidden risks.

Preparation is everything. Having a well-organized virtual data room before diligence begins is the single most important factor for a smooth process.

Financial and legal documents are the foundation. These areas receive the most intense scrutiny and are where most deals fall apart.

Be transparent. It's better to proactively disclose a minor issue than to have the buyer discover it and lose trust.

The Comprehensive Due Diligence Checklist

We’ve broken down the checklist into the five key areas that every buyer investigates.

1. Financial Due Diligence

This is where the buyer confirms the financial health and performance of your business. They want to ensure the numbers are accurate, sustainable, and predictable.

Audited/Reviewed Financial Statements: At least 3-5 years of historical financial statements (P&L, Balance Sheet, Cash Flow Statement). Audited financials carry the most weight.

Quality of Earnings (QoE) Report: Many serious buyers will commission their own QoE report to validate your EBITDA, normalize earnings, and analyze the quality of your revenue and cash flows. Be prepared for this.

Tax Returns: At least 3-5 years of federal, state, and local tax returns to verify filings and compliance.

Debt Agreements: A complete list of all outstanding debts, credit lines, and loan agreements, including terms, interest rates, and covenants.

Accounts Receivable & Payable Aging: Detailed reports to assess the quality of your receivables (how likely you are to get paid) and your payment cycles to vendors.

2. Legal & Corporate Due Diligence

The buyer's legal team will review your corporate structure and legal standing to ensure there are no hidden liabilities.

Corporate Records: Your articles of incorporation, bylaws, board meeting minutes, and a clean capitalization (cap) table.

Material Contracts: All significant customer and supplier contracts, leases for property and equipment, and partnership agreements. Buyers look for change-of-control clauses.

Litigation History: A summary of any past, pending, or threatened lawsuits or legal claims against the company.

Permits & Licenses: Proof of all necessary federal, state, and local permits and licenses required to operate your business legally.

Regulatory Compliance: Documentation showing compliance with industry-specific regulations (e.g., HIPAA for healthcare, GDPR for data).

3. Commercial & Operational Due Diligence

This area focuses on how your business actually runs day-to-day and its position in the market.

Customer Analysis: A list of your top customers by revenue, including data on customer concentration (risk), retention rates, and churn.

Supplier Dependencies: A list of your key suppliers and any risks associated with them (e.g., single-source suppliers, pricing volatility).

Sales & Marketing Processes: Documentation of your sales pipeline, marketing strategies, customer acquisition cost (CAC), and customer lifetime value (LTV).

Internal Workflows & Systems: An overview of the key processes and software (ERP, CRM) that run the business.

Inventory Report: A detailed summary of inventory on hand, valuation methods, and turnover rates.

4. People & HR Due Diligence

The buyer is not just acquiring assets; they are often acquiring a team. They need to understand the structure, cost, and risks associated with your employees.

Employee Roster: An anonymous list of all employees with their title, tenure, and current compensation (salary, bonus, benefits).

Employment & Contractor Agreements: Standard employment contracts, offer letters, and agreements for all independent contractors.

Key Employee Dependencies: Identification of any "key-person risk" where the business relies heavily on a few individuals.

Benefits & Compensation Plans: Details on health insurance, retirement plans (like a 401k), and bonus structures.

HR Policies & Compliance: Your employee handbook, records of HR complaints, and proof of compliance with labor laws.

5. Technology & Intellectual Property (IP) Due diligence

For any business with a technical component, this is crucial. The buyer wants to ensure your IP is protected and your technology is sound.

IP Portfolio: A schedule of all registered patents, trademarks, copyrights, and domain names.

Proprietary Technology: Documentation and code for any software or technology developed in-house.

Software Licenses: A list of all third-party software used by the business and proof of valid licenses.

Data Security & Privacy Policies: Your company's policies and procedures for protecting customer and company data.

IT Infrastructure Map: An overview of your servers, networks, and key IT assets.

Call-to-Action (CTA):

Feeling overwhelmed? The due diligence process is intense, but you don't have to navigate it alone. Proper preparation can be the difference between a closed deal and a broken one.

Our M&A advisors specialize in helping business owners prepare their data room, anticipate buyer questions, and manage the diligence process with confidence.

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