Due diligence checklist for buying a business
Due diligence is not an inspection you either pass or fail. It is repricing. Almost nothing you find is a reason to walk away; most findings are a reason to pay less, pay later, or make the seller carry the risk. So the checklist below is grouped not by department but by what each finding does to the deal — because a list that does not tell you what to do with the answer is just homework.
Start with the only question that matters
Before any checklist: does the profit survive the owner leaving?
Everything else is detail by comparison. You are buying future earnings, and the price is normally repaid out of them. If the departing owner personally holds the key customer relationships, the technical knowledge, the supplier terms or the pricing authority, then the earnings you are paying for leave when they do.
The practical test is not to ask the seller, who will say it is fine. It is to work out, line by line, who the customer would call if the owner were unreachable for a month. Do that before you spend anything on advisers.
The financial checks
| Check | What you are looking for | What it does to the deal |
|---|---|---|
| Do the accounts reconcile to the bank? | Statutory accounts, management accounts and actual bank statements telling the same story. | If they do not, everything downstream is unreliable. This is the one finding that is genuinely a reason to stop rather than reprice. |
| Which costs disappear, and which appear? | Owner salary and benefits, one-off items, family on the payroll — and what you must add back in, such as a manager to do what the owner did. | Changes the profit the multiple is applied to, so it moves the price directly. |
| Customer concentration | What share of revenue the largest customer represents, and the next four. | High concentration lowers the multiple and usually pushes more of the price into deferred payments or an earn-out. |
| Is revenue recurring or repeated? | Contracted revenue with notice periods, versus customers who simply happen to come back. | Contracted revenue supports a materially higher multiple than habit does. |
| Working capital | How much cash the business needs tied up in stock and unpaid invoices just to keep running. | Frequently missed. If it is not addressed in the deal, you fund it yourself on day one, on top of the price. |
| Capital spending due | Equipment, vehicles or systems at the end of their life. | Comes straight out of your year-one headroom, which is exactly where there is least of it. |
The checks that are really about you
Three areas decide whether the business works the day after completion, and none of them appear in the accounts:
- Who actually runs it. Not the org chart — who makes the decisions, who the staff ask, and which of those people are staying. A business where the second-in-command leaves with the owner is a different purchase from the one you were shown.
- What the customers are buying. A relationship with a person, or a service from a company? The first does not transfer; the second does.
- What you are taking on. Leases, supplier agreements, equipment finance, software contracts and anything with a personal guarantee or a change-of-control clause attached. Some agreements simply end when the owner does, which can remove a supplier you assumed you were buying.
These need a solicitor and an accountant to look at properly. What you can do first, for nothing, is write down what you are assuming about each one — because due diligence is mostly the process of finding out which assumptions were wrong.
Seven things that most often kill a deal
| Finding | Usual outcome |
|---|---|
| Accounts that do not reconcile to the bank | Walk away. Not a pricing problem. |
| The profit was the owner working unpaid hours | Reprice on the real profit once a replacement is costed in. |
| One customer is most of the revenue | Lower multiple, and more of the price deferred or tied to that customer staying. |
| Key staff leaving with the owner | Renegotiate, or make completion conditional on them signing on. |
| A lease or contract ends on a change of control | Fix before completion. Discovering it afterwards is expensive. |
| Working capital was never discussed | Adjust the price, or you fund it on day one out of your own pocket. |
| The year-one repayment leaves no headroom | Restructure the schedule. This is arithmetic, not negotiation — run it before you argue about the multiple. |
The order that saves money
Advisers are expensive and due diligence generates a lot of work at once, while you are still doing your day job. Sequencing it stops you paying professionals to discover something you could have established yourself for nothing:
- Test whether the profit survives the owner leaving. Free, and it ends roughly half of all conversations.
- Run the year-one arithmetic. Also free. If the deal cannot pay for itself at a sensible structure, the rest is academic.
- Ask for the accounts and reconcile them to the bank. Still cheap. Everything after this depends on it.
- Then engage a solicitor and an accountant for contracts, employment, tax and anything with a signature on it.
Buyers almost always reverse steps two and four, and pay for professional time on a deal the arithmetic had already ruled out.
Arithmetic and general information only — not financial, tax, legal or investment advice. This is a list of things to look into, not a substitute for looking into them: buying a business needs a solicitor and an accountant, and your own figures decide everything.
Do this sum for free
free acquisition affordability calculator — work out what the deal costs in its first year against the profit that has to cover it, and what happens at 10% below plan — before the asking price is worth arguing about. It runs in your browser and nothing you type is sent anywhere.
If you would rather not build it yourself
The Business Sale Readiness & Valuation toolkit ($499) is a full valuation model with a sensitivity table across multiples, and a weighted review of the ten areas a buyer examines — a seller uses it to prepare, a buyer uses it to find what has not been prepared. One-time purchase, instant download.
See inside it first — every sheet, every row and the real formulas, with no email and no account.
Frequently asked questions
What is due diligence when buying a business?
It is the process of checking what you are actually buying before completion: whether the accounts reflect reality, which costs change under new ownership, how concentrated the customers are, what contracts and obligations transfer with the business, and whether the profits depend on the person selling it.
How long does due diligence take when buying a small business?
It varies widely with the size and tidiness of the business, and the timetable is normally set by the exclusivity period agreed in the heads of terms rather than by the work itself. The practical constraint is that a large volume of requests arrives at once while you are still doing your day job.
What should you check first when buying a business?
Whether the profit survives the owner leaving. You are buying future earnings and the price is usually repaid out of them, so if the departing owner personally holds the customer relationships, technical knowledge or supplier terms, the earnings you are paying for may leave with them. Establishing that costs nothing and ends a good proportion of conversations.
What are the biggest red flags when buying a business?
Accounts that do not reconcile to the bank statements is the one that is genuinely a reason to stop rather than to renegotiate, because everything else you check depends on the numbers being real. After that: one customer being most of the revenue, key staff leaving with the owner, contracts that end on a change of control, and working capital nobody has accounted for.
Do I need a solicitor and an accountant to buy a business?
Yes for the contracts, the employment position and the tax treatment. What you can do first, for nothing, is test whether the profit survives the owner leaving and whether the deal pays for itself in year one, because both of those can rule out a purchase before you spend anything on professional fees.
What is working capital in a business purchase?
The cash the business needs tied up in stock and unpaid customer invoices simply to keep trading. It is frequently left out of the negotiation, and when it is, the buyer funds it themselves on day one on top of the purchase price.
Sources
- Instilus: how to value a small business — checked 2026-09-24
- Instilus: how a management buyout gets paid for — checked 2026-09-24
- Instilus: SDE vs EBITDA, which profit figure a buyer uses — checked 2026-09-24