What Buyers Look For During Due Diligence

Due diligence is where deals go to get tested. It's the 60 to 90 day window between a signed letter of intent and closing where the buyer's team — accountants, lawyers, and often an operations consultant — verifies everything the seller has represented about the business. Having worked both sides of this process, I can tell you exactly what they're looking for and where sellers most often stumble.

60–90 DaysTypical Due Diligence Period
5 Core AreasFinancial, Legal, Operational, Customer, Employee
30%+ of DealsReprice or Fail During Diligence
3 Years MinimumFinancial History Reviewed

This article breaks down the five core areas buyers investigate, what triggers red flags in each area, and how to prepare so that nothing in diligence surprises you or your buyer.

Area #1: Financial Due Diligence

This is always the most intensive part of the process and where the majority of re-trades happen. The buyer's accountant — often a third-party quality-of-earnings (QofE) firm — will request three to five years of tax returns, profit and loss statements, balance sheets, bank statements, and general ledger detail.

What they're doing is simple in concept: they're reconciling your stated earnings to your tax returns and your bank statements to determine what the actual, sustainable, transferable earnings of the business are. Every add-back you've claimed — personal expenses, one-time costs, above-market owner compensation — will be scrutinized and either accepted or rejected.

The most common problems I see: revenue on the P&L that doesn't match deposits in the bank account. Personal expenses classified as business expenses without proper documentation. Cost of goods sold that fluctuates without a clear explanation. Accounts receivable with significant aging that suggests collection problems.

The preparation: have your CPA prepare a seller-side financial review before you go to market. This doesn't have to be a full audit — a compilation or review engagement that reconciles your P&Ls to your tax returns and identifies any discrepancies will cost $5,000 to $15,000 and save you from a surprise re-trade that could cost ten times that amount.

Area #2: Legal and Compliance Due Diligence

The buyer's attorney will review every legal agreement the business has: customer contracts, vendor agreements, employee offer letters, commercial leases, non-compete agreements, licensing and permits, and any pending or historical litigation.

What they're looking for: contracts with change-of-control provisions that could let a customer or vendor exit the relationship post-sale. Lease terms that are unfavorable or expiring soon. Pending lawsuits or regulatory actions that could create liability. Missing licenses or permits that could interrupt operations. Employee classification issues — specifically, whether people classified as 1099 contractors should legally be W-2 employees.

The preparation: pull every contract, lease, and agreement you have. Read the assignment and change-of-control clauses. Identify any that expire within 12 months. Talk to your attorney about anything that could create post-closing liability. Resolve any outstanding legal issues before engaging a buyer — a pending lawsuit that you've been ignoring becomes a material disclosure item that can delay or kill a closing.

Area #3: Operational Due Diligence

This is where buyers evaluate whether the business will actually continue to perform after the sale. They're assessing the management team, the systems and processes, the technology stack, the physical assets, and — critically — how dependent the business is on the current owner.

The questions they'll ask: Who manages day-to-day operations? What happens if the owner leaves on day one? Are there documented standard operating procedures? Is the technology current or does it need significant investment? What's the condition and remaining useful life of equipment and vehicles? How is quality controlled?

For businesses that rely heavily on the owner, this is where deals get repriced. A buyer who discovers during operational diligence that the owner prices every job, manages every customer relationship, and supervises every employee will factor the cost and risk of replacing the owner into their offer — typically at a 20 to 40 percent discount.

The preparation: document your key processes. Have an organizational chart that shows who does what. Make sure your GM or operations manager can articulate the business's workflows without deferring to you. Buyers interview key employees during diligence — those employees should be able to describe a business that functions, not one that waits for the owner to decide.

Area #4: Customer Due Diligence

Buyers want to understand the quality, concentration, and durability of the revenue stream. They'll analyze customer revenue by account, looking for concentration risk — any single customer representing more than 15 to 20 percent of total revenue is a flag. They'll look at customer retention rates, contract terms, and renewal history.

In many deals, the buyer will request permission to contact your top five to ten customers directly. This is one of the most sensitive parts of the process and needs to be managed carefully — typically it happens late in diligence, after all other confirmations are substantially complete, and it's done with the seller present or at minimum with a carefully scripted introduction.

What buyers are listening for in those customer calls: how long have they been a customer? Why do they buy from this company? Do they have a relationship with anyone other than the owner? Would they continue buying if the ownership changed? Are there any service issues they're unhappy about?

The preparation: know your customer concentration numbers before you go to market. If one customer is 25 percent or more of revenue, you need a strategy — either diversify before selling, get a long-term contract in place, or be prepared to address it in the deal structure, possibly through an earnout.

Area #5: Employee and HR Due Diligence

Buyers evaluate the workforce as a critical asset — particularly in service businesses, healthcare, and professional services where the employees are the product. They'll review headcount, tenure, compensation and benefits, employment agreements, turnover rates, and organizational structure.

Key concerns: key-person risk — is there one employee without whom the business can't function? High turnover that suggests management or culture problems. Compensation that's significantly above or below market, which creates either a margin problem or a retention risk. Missing employment agreements for critical roles. Pending HR complaints or EEOC issues.

The preparation: get employment agreements in place for your top five to ten employees — especially your GM, sales lead, and anyone with direct customer relationships. Include reasonable non-competes and confidentiality provisions. Consider retention bonuses tied to the transaction closing. Review your benefits package and make sure it's competitive enough that key employees won't leave during a transition period.

How to Prepare: The Seller's Diligence Checklist

The best preparation for buyer due diligence is to run your own due diligence first. I recommend every seller go through this process 6 to 12 months before engaging a buyer. Pull your financials and reconcile them yourself. Read every contract you've signed. Document your operations. Know your customer concentration. Get your employment agreements in order.

The sellers who do this are the ones who close on time and at the price they expected. The sellers who don't are the ones who get surprised — and surprises during diligence almost always cost money, either through a price reduction, a deal delay, or a complete deal failure.

John's Take

Due diligence isn't an obstacle — it's a verification process. If your business is what you say it is, diligence should confirm that. The problems happen when sellers haven't looked at their own business critically before putting it on the market.

I tell every seller the same thing: if you wouldn't want to discover something during diligence, find it now and fix it. Every issue has a solution — but solutions get more expensive and more complicated the closer you get to a closing date. The time to prepare is before you have a buyer, not after.

If you're thinking about selling and want to know where your business stands, start with a free valuation estimate and then schedule a call to walk through what a diligence process would look like for your specific situation.

Frequently Asked Questions

How long does due diligence take in a business sale?
Typical due diligence periods run 60 to 90 days from the signed letter of intent. Complex deals or transactions involving real estate, regulatory approvals, or SBA financing can extend to 120 days. The timeline depends on how prepared the seller is — organized sellers with clean documentation close faster.
What financial documents do buyers request during due diligence?
Buyers typically request three to five years of tax returns, profit and loss statements, balance sheets, bank statements, general ledger detail, accounts receivable and payable aging, and a detailed list of add-backs to seller's discretionary earnings. A quality-of-earnings analysis reconciles all of these to verify the stated earnings.
Can a buyer renegotiate the price during due diligence?
Yes. If due diligence reveals that the business's actual earnings, risks, or condition differ materially from what was represented, the buyer can and often will propose a revised purchase price. This is called a re-trade. The best way to prevent it is to run your own due diligence before going to market and price the business based on verified financials.
Will the buyer talk to my customers during due diligence?
In most transactions, yes. Customer reference calls typically happen late in the diligence process — after financial and legal review is substantially complete. The calls are usually managed carefully with the seller's involvement to protect confidentiality. Buyers listen for customer loyalty, satisfaction, and whether the relationship will survive an ownership change.