Once you have an interested buyer, one of the most important — and intense — phases of the sale begins: due diligence. This is when the buyer examines every detail of your business to confirm it’s as strong and stable as you’ve represented.
The better prepared you are, the smoother this process will be — and the more likely your deal will close without delays or price reductions.
What Is Due Diligence?
Due diligence is the buyer’s opportunity to “look under the hood” of your business. They’ll want to see proof of financial performance, verify contracts, understand your operations, and assess any potential risks.
It’s often a make-or-break stage. If buyers uncover problems you haven’t disclosed, it can lead to renegotiation, additional demands, or even a cancelled deal. If you fail to disclose something or worse, conceal something, it can give the buyer the right to sue you for damages or even undo the deal.
Key Areas Buyers Review
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Financials
- Past 3 years of financial statements (audited if available).
- Tax returns.
- Detailed breakdown of revenue, expenses, and profit margins.
- Records of debt, liabilities, and contingent obligations.
- Quality of Earnings report. While not a must have, it has become increasingly common for sellers to prepare and provide.
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Legal
- Business licenses and permits.
- Corporate governance documents (articles, bylaws, shareholder agreements).
- Contracts and agreements (customer, vendor, leases).
- Any pending or past litigation.
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Operations
- Business model and processes.
- Supplier and customer relationships.
- Marketing and sales strategies.
- Competitive landscape and industry positioning.
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Employees
- Payroll records and benefit plans.
- Key employee agreements.
- HR policies and compliance records.
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Intellectual Property
- Patents, trademarks, copyrights.
- Ownership documentation.
- Any known or potential infringement issues.
Using a Virtual Data Room (VDR)
A Virtual Data Room is a secure online platform where you can organize and share documents with the buyer’s team.
Advantages include:
- Controlled access to sensitive information.
- Easy organization and searching of documents.
- An audit trail showing who viewed what, and when.
A well-organized VDR shows buyers you’re serious, prepared, and professional — which can help maintain deal momentum. You can use a variety of free or paid VDRs, with varying degrees of control and customization.
Remember that if you provide due diligence to multiple buyers, such as in an auction, you have to provide the same access to each potential buyer. Because due diligence usually only happens after a Letter of Intent has been signed, this is not a common issue.
How to Prepare for Due Diligence
- Start early. Gather and organize documents before you even start marketing your business.
- Be thorough. Missing information slows the process and raises red flags.
- Be transparent. Disclose known issues upfront — it builds trust and avoids surprises later.
- Work with advisors. Your attorney and accountant can help ensure your materials are complete and accurate.
Why Preparation Pays Off
When you’re organized, buyers spend less time hunting for information and more time focusing on the value of your business. This can shorten the deal timeline, reduce stress, and protect your negotiating position.
FAQs
Q: How long does due diligence take?
A: It depends on the size and complexity of your business, but 30–90 days is common.
Q: Should I hide minor problems?
A: No — buyers will likely find them. Addressing issues upfront builds credibility and allows you to control the narrative.
Most agreements contain an affirmative statement by the sellers that they have provided all material information and not concealed any material information from the buyer. Its best to be prepared so you are not worried about hiding anything.
Q: Can due diligence cause the deal to fall apart?
A: Yes — but preparation greatly reduces that risk.
