Due Diligence for Business Buyers

Most business acquisitions fail not at closing — they fail 12–36 months later, when buyers discover things that weren't apparent in the CIM. Thorough due diligence is the only defense against this outcome.

The goal of buyer due diligence is not to find a reason not to buy. It's to confirm the business is what it's represented to be — and to surface any material issues that should affect your price, deal structure, or decision.

Financial Due Diligence (Quality of Earnings)

Financial QofE is the most critical component of any business acquisition. You're trying to answer: is the EBITDA or SDE number in the CIM real, reproducible, and likely to continue under new ownership?

What to Verify

• Reconcile CIM financials to actual tax returns and bank statements for each year presented
• Challenge every add-back — verify that owner compensation add-backs are documented, one-time items are genuinely non-recurring, and personal expenses are real
• Review accounts receivable quality — aging, bad debt history, and concentration
• Examine revenue seasonality and working capital requirements
• Assess capex history and future needs — is the business underspending on maintenance?
• Review payroll and benefits in detail — are there underfunded retirement plans or deferred compensation obligations?

For acquisitions above $2M, engage a CPA or accounting firm to conduct a formal QofE analysis. The cost ($10K–$30K) is small relative to the protection it provides.

Customer & Revenue Due Diligence

Revenue quality is often more important than revenue size. Concentrated, non-recurring, or relationship-dependent revenue is the most common source of post-acquisition surprises.

• Request a full customer list with revenue by account for the last 3 years
• Identify concentration — any single account above 15–20% of revenue is a material risk factor
• Review all long-term customer contracts — are they transferable? What is the renewal history?
• Identify key accounts that are personal relationships with the owner vs. institutional relationships with the company
• Assess customer churn and acquisition — is revenue growing because of good retention or constant new customer replacement?

Operational Due Diligence

Financial performance is the output of a set of operational systems. You're buying those systems — not just the historical numbers.

• Assess management team depth — who stays after close, what roles will need to be filled?
• Review key employee agreements — non-competes, non-solicitation, offer letters
• Identify owner dependence — list the specific decisions and relationships that require the owner
• Evaluate technology systems — CRM, ERP, field service software, POS — age, quality, and integration
• Review equipment condition and maintenance records (particularly for manufacturing or service fleet businesses)
• Assess supplier relationships — sole-source dependencies, contract terms, pricing agreements

Legal & Compliance Diligence

Legal diligence requires an attorney. Budget for it — the cost is small relative to the exposure of missing a significant legal issue.

• Review all pending and threatened litigation
• Check UCC filings and existing liens on assets
• Verify licenses and permits are current and transferable
• Review all material contracts — customer, vendor, employment, lease
• Assess compliance with applicable regulations (OSHA, EPA, state licensing requirements)
• Review intellectual property — trademarks, trade secrets, proprietary systems

Real Estate & Facilities

The facility you're acquiring is often as important as the business itself — particularly for manufacturing or service companies that require specific physical infrastructure.

• Review lease terms — remaining term, renewal options, rent escalations
• Assess occupancy cost as a percentage of revenue
• For owned real estate: obtain an appraisal and Phase I Environmental Site Assessment
• Confirm the facility can support your post-acquisition growth plans

What to Do When You Find a Problem

Due diligence almost always surfaces something unexpected. The question is whether it's a deal-stopper or a deal-adjuster.

Material issues that warrant walking away: undisclosed litigation with significant exposure, fraudulent financial representations, undisclosed environmental liability, loss of a key customer before close, or structural issues that make the business non-viable as represented.

Issues that warrant price or structure adjustment: higher capex requirements than anticipated, one-time revenue that inflated the CIM, customer concentration that's higher than disclosed, or deferred maintenance on equipment. These can typically be addressed through a purchase price reduction, an earnout structure, escrow holdbacks, or enhanced representations and warranties.