Due diligence document checklist
What buyers usually ask for, area by area, why it matters to the price or the deal, and how to get ahead of it.
| Area | What buyers ask for | Why it matters | Seller tip |
|---|---|---|---|
| Financial statements | Profit and loss statements and balance sheets for recent years and year to date, bank statements and the general ledger. | The price is a multiple of earnings, so the buyer has to prove the earnings are real and repeatable. | Reconcile your statements to your tax returns and bank deposits before a buyer does it for you. |
| Earnings adjustments | A schedule of add-backs (owner pay, personal expenses, one-time costs) with receipts or other support for each one. | Every add-back that survives raises the earnings the price is based on. Every one that fails lowers it. | Claim only add-backs you can document. One weak add-back makes the buyer doubt the rest. |
| Tax returns and filings | Federal and state income tax returns, sales and use tax filings, payroll tax filings and any notices from tax authorities. | Unpaid taxes can follow the business, and the returns are the buyer's independent check on your reported income. | Resolve open notices and late filings now, before they become an escrow demand. |
| Corporate records | Formation documents, operating agreement or bylaws, ownership records and any buy-sell agreements. | The buyer needs proof that you own what you are selling and have authority to sell it. | Get every co-owner's written agreement to the sale early. A missing signature can hold up closing. |
| Customer and supplier contracts | Revenue by customer, key customer and supplier contracts, equipment leases, loans, personal guarantees and any change-of-control clauses. | Customer concentration and contracts that can be cancelled on a sale are the biggest risks to future earnings. | Flag contracts that need consent to transfer, and list every personal guarantee you will want released at closing. |
| Real estate and leases | Property deeds or leases, amendments, landlord consents, and for owned or industrial sites, environmental reports. | A lease that can't be assigned, or contamination on the site, can stop the deal outright. | Read the assignment clause in your lease now. If the landlord must consent, budget time for it. |
| Employees and benefits | Org chart, roster with pay and tenure, contractor agreements, benefit plans and any employment claims. | The buyer needs the team to stay, and misclassified workers or unpaid wages become its liability. | Agree with the buyer when key staff will be told, and share personnel files late. |
| Licenses, permits and legal matters | Licenses and permits, inspections, insurance and claims history, and past or pending lawsuits. | Some licenses don't transfer, and open legal matters are risks the buyer will price or exclude. | Check which licenses are tied to you personally. A new owner may need to apply for its own. |
| Intellectual property and IT | Trademarks, domain names, software licenses, customer data practices, system access and any security incidents. | The buyer needs to own the brand and data it is paying for, and to know its exposure to a breach. | Make sure domains and key software accounts are in the company's name, not yours or a former employee's. |
| Assets and inventory | Fixed asset list, equipment condition and maintenance records, inventory counts and valuation, and liens on assets. | Asset condition affects what the buyer will spend after closing, and liens must be cleared before title passes. | Do a physical inventory count close to the diligence period and clean out obsolete stock. |
What due diligence is, and who does it
Due diligence is the buyer's investigation of your business between the letter of intent and the purchase agreement. Until then the buyer has relied on what you told them; diligence is where they check it. The SBA tells buyers to make a thorough, objective investigation with an attorney and an accountant, and lists the documents they should review, including financial statements, tax returns, and contracts and leases [2].
In a small deal the work is usually split three ways. The buyer's accountant or a quality of earnings firm tests your numbers. The buyer's lawyer reviews your corporate records, contracts and legal exposure. A lender, if there is one, runs its own underwriting in parallel. Larger buyers add specialists for IT, insurance, environmental and benefits.
For where diligence sits in the whole sale, from preparation to handover, see how to sell a business.
Stage 1: The letter of intent and exclusivity
Diligence starts when you sign a letter of intent (LOI). It sets the price, the structure (asset or stock sale), how the buyer will pay, and an exclusivity period. Most of an LOI is non-binding, but confidentiality and exclusivity (no-shop) provisions usually are binding [1].
Exclusivity is the seller's biggest concession: once you sign, you stop talking to other buyers, and your leverage drops. Surge Business Law suggests matching exclusivity to the diligence period plus a cushion for negotiating the final agreement, for example 75 to 90 days when diligence is 60 days [1].
Push for an LOI that is specific about what usually causes fights later: how working capital is measured, how much is cash at closing, and whether any of the price is a seller note or earnout. A vague LOI moves the negotiation into diligence, where you have less leverage.
Stage 2: The data room and the document request list
Within days of the LOI, expect a long document request list, partly irrelevant to a business your size, because buyers use standard lists. Answer what applies and mark what doesn't, rather than leaving items blank.
Documents go into a data room, which is a secure online folder with access controls and a log of who viewed what. A well-organized shared drive works for a small deal. Mirror the request list's order, name files clearly, and track every request and the date you answered.
Confidentiality should already be covered by the non-disclosure agreement the buyer signed before seeing your financials. Check that it bars soliciting your staff and customers and requires your documents back if the deal dies. The SBA lists the confidentiality agreement among the documents an attorney should review [2].
Stage 3: Financial diligence and quality of earnings
Financial diligence decides whether the price holds: every dollar of earnings the buyer can't verify comes off the price at a multiple.
On many deals the buyer commissions a quality of earnings (QoE) report from an accounting firm. Not an audit, it rebuilds your earnings from the general ledger and bank statements, tests your add-backs, normalizes one-time items, checks how revenue is recognized, and ends with an adjusted EBITDA figure the buyer compares to the one in the LOI. If you report seller's discretionary earnings, see SDE vs EBITDA for how the two measures differ.
The other big financial topic is net working capital. Most deals assume the business comes with a normal level of receivables, inventory and payables. The buyer will propose a target, often called a peg, based on a recent average. If working capital at closing comes in below the peg, the price drops by the difference. Few owners model this mechanism, and it can cost as much as a headline price cut.
Stage 4: Tax diligence
Tax diligence looks backward and forward. Backward: has the business filed and paid its income, payroll, and sales and use taxes, and are there open audits or notices? Unpaid taxes can follow the business, so buyers fix them before closing or hold back money to cover them.
Forward: how will the deal itself be taxed? The IRS says the sale of a business is usually a sale of all its assets, each treated separately, so inventory can produce ordinary income while other assets produce capital or section 1231 gain [3]. In an asset sale where goodwill or going concern value attaches, both buyer and seller file Form 8594 to report how the price was allocated [4]. The allocation follows the residual method across seven asset classes, with goodwill and going concern value in Class VII, and the form is generally attached to each party's income tax return for the year of the sale [5].
Buyer and seller often want opposite allocations, so settle it in the purchase agreement, not after closing. Have your accountant model it first, and see taxes when selling a business.
Stage 5: Legal diligence
The buyer's lawyer confirms that you can sell what you say you are selling, and looks for liabilities the buyer would inherit. Expect review of:
- Corporate records: ownership, authority to sign and other owners' rights.
- Material contracts, especially change-of-control and anti-assignment clauses that let a customer, supplier or landlord cancel or renegotiate on a sale.
- Liens and debt. Lenders record security interests in a public filing office under Article 9 of the Uniform Commercial Code [6], so the buyer will run UCC, tax lien and judgment searches. Every lien has to be paid off or released at closing.
- Litigation, threatened claims and regulatory history.
- Licenses and permits, and whether they transfer to a new owner or must be reissued.
- Intellectual property: who owns the trademarks, domains and software, and whether contractors signed assignments.
Stage 6: Commercial diligence and customers
Commercial diligence asks whether the revenue will still be there after you leave: how concentrated it is, how long customers stay, how much is recurring or under contract, and whether pricing is holding.
Some buyers ask to speak with key customers. Agree in writing who will be contacted, when, by whom and what they will be told, and push for it to happen only once the purchase agreement is nearly final. A customer who hears too early is a risk you carry if the deal fails.
The deeper question underneath is owner dependence. If customers buy from you personally, the buyer will want a longer transition, part of the price tied to future results, or both. See what buyers look for in a business for how buyers judge this.
Stage 7: Operations and employees
Operational diligence checks how the business runs: suppliers, capacity, equipment and upcoming capital needs, safety records, and what would break without you.
Employee diligence focuses on the people the buyer needs to keep and the liabilities it could inherit. Expect questions about key employees and whether they will stay, pay, contractors who may be misclassified, overtime, accrued vacation, benefit plans and claims. Decide early which employees learn about the sale, and when.
Larger businesses have one more item: under the federal WARN Act, which covers employers with 100 or more employees excluding part-time staff, the seller is responsible for any required notice of a plant closing or mass layoff up to and including the effective date of the sale, and the buyer after it [7].
Stage 8: IT, data and systems
Even small buyers now look at systems: what software runs the business, whether licenses transfer, who holds the admin passwords, where customer data lives, how it is backed up, and whether there has been a breach.
Beforehand, move domains and software accounts into the company's name, document access, and turn on multi-factor authentication. These cheap fixes remove easy objections.
Stage 9: Environmental and real estate
If the business owns or occupies property where hazardous materials are or were used, such as manufacturing, auto repair or fuel, expect an environmental review. Buyers commonly order a Phase I environmental site assessment. The EPA's All Appropriate Inquiries rule lets certain purchasers protect themselves from strict federal cleanup liability by making the required inquiries before buying, and recognizes the ASTM E1527-21 Phase I standard as meeting that rule [8]. A concern can trigger a Phase II with sampling, which adds time.
For leased space, the buyer's lawyer will read the lease for the term, renewal options and, above all, whether the landlord must consent to an assignment or a change of control. Landlord consent is a common cause of closing delays, because the landlord has no deadline.
Stage 10: Confirmatory diligence and closing
As the purchase agreement nears final form, diligence narrows to confirmation: updated monthly financials, a fresh lien search, final customer and landlord consents, lender approval and the closing working capital estimate. The agreement also restricts what you can do in the business between signing and closing.
Very large deals may also need a federal premerger filing under the Hart-Scott-Rodino Act. For 2026 the size-of-transaction threshold is $133.9 million [12], far above most owner-operated sales. License transfers in regulated industries are more likely to matter.
At closing the buyer funds, liens are paid from the proceeds, any escrow is deposited, and ownership transfers.
The issues that most often reprice or stall a deal
Most findings are settled with a document or an explanation. The ones that move the price or the timeline tend to be the same few:
- Earnings that don't hold up: unsupported add-backs, revenue recognized early, or a strong recent year that looks like an outlier.
- Declining results during diligence. If the months after the LOI come in weaker than the months before, the buyer will reprice to the new trend.
- Customer concentration, or a key contract that can be cancelled on a sale.
- Owner dependence: the relationships, know-how or licenses that walk out the door with you.
- Working capital disputes over the peg, inventory value or old receivables.
- Tax exposure, especially unfiled sales tax in states where you have customers, or misclassified workers.
- Consents that take time: landlords, franchisors, key customers, licensing agencies.
- Problems the buyer finds rather than hears from you. Even small ones cost trust.
- Slow answers, which read as a hidden problem while the exclusivity clock runs.
How findings flow into the purchase agreement
Diligence and the purchase agreement are negotiated at the same time, and every finding lands somewhere in the agreement.
Representations and warranties are your written statements of fact about the business, such as that the financials are accurate and taxes are paid. A warranty is a promise about the existence or accuracy of specific facts that becomes part of the contract [9], and if it turns out to be false, the buyer can claim against you. You limit that exposure with disclosure schedules: anything you list against a representation is generally treated as known to the buyer. A problem you schedule is a negotiation; a problem you hide is a claim.
Indemnities are your commitment to compensate the buyer for specified losses [10], such as breaches of your representations or taxes for periods before closing. The agreement normally limits them with a deductible or basket the buyer absorbs first, a cap on your total exposure, and a survival period after which claims expire. Known issues often get their own special indemnity.
Escrows and holdbacks back up the indemnities. Part of the price is deposited with a neutral escrow agent and released only when the agreed conditions are met [11], or the buyer simply holds back part of the price. Part of the price may also be paid later; see earn-outs and seller notes. Larger deals sometimes use representations and warranties insurance to shift risk to an insurer.
A serious finding may also change the price, the structure (an asset sale instead of a stock sale, say) or the closing conditions.
How to prepare for due diligence as a seller
Prepare before you sign an LOI, while fixes are cheap and you still have leverage:
- Consider a sell-side quality of earnings report. Your own QoE finds what a buyer's accountant would, while you can still fix or explain it.
- Clean the books: reconcile statements to tax returns and bank accounts, stop running personal expenses through the business, and document every add-back.
- Build the data room before you need it, organized by the areas in the checklist above.
- Read your own key contracts and lease for assignment and change-of-control clauses, list every consent you will need, and line up payoff letters for any liens.
- Fix what is cheap to fix: open tax notices, expired permits, domains and software in your personal name, missing IP assignments.
- Make a list of known problems and decide how you will disclose them. Telling the buyer first keeps control of the conversation.
- Hire your own advisors early: a transaction attorney and an accountant who has done deals, plus a broker or M&A advisor if you want representation.
- Keep running the business. Results that dip during diligence get repriced.
What Axia does and doesn't do
Axia Growth finds privately held companies that fit a buyer's acquisition criteria, calls their owners, and introduces interested owners to that buyer. The buyer pays Axia. Owners pay Axia nothing [13].
Axia does not take part in due diligence or closing. It does not represent sellers, value businesses, negotiate terms or structure deals, and it holds no business-broker, real estate or securities license [13]. Diligence is between you, the buyer and your advisors. See how it works for what an introduction involves, and should I use a business broker if you want representation.
Know your number before diligence starts
If a buyer comes back with a lower number, you want to know whether the cut is proportionate to what they found. The multiples index shows median EBITDA and SDE multiples by sector and size band [14], and the value range calculator applies them to your earnings in about a minute. See also asking price vs sale price.