Due Diligence Checklist for Buying a Small Business (2026)

Financial Due Diligence: The Core Verification Process

Financial due diligence is the verification of the seller's represented earnings and financial position. It is the most critical diligence category because the purchase price is derived from earnings, and any material discrepancy in earnings produces a direct impact on valuation.

What financial diligence covers:

Tax return verification. Three years of federal business tax returns reconciled to the P&L statements presented by the seller. The most common discrepancy: sellers present adjusted P&Ls with high add-backs but cannot show corresponding deductions on the tax return. Every add-back should have a corresponding transaction in the underlying records.

Revenue quality analysis. Not all revenue is equal. Break down revenue by customer, contract status, payer type (for healthcare), and recurrence. Calculate year-over-year revenue growth or decline by customer cohort. Identify any customers who have already left or are at risk of leaving. Revenue that has already left the business as of your acquisition date is not revenue you are paying for — but sellers sometimes include departing customers in the trailing 12-month revenue basis.

Accounts receivable aging. A clean AR aging with most receivables under 60 days is a positive signal. A heavily backloaded AR aging (significant balances at 90+ days) suggests collection problems, billing disputes, or customers in financial difficulty. Verify that AR balances are collectible before they are included in a working capital adjustment that benefits the seller.

Accounts payable and accrued liabilities. Sellers sometimes manage cash flow pre-sale by delaying payables. If AP is unusually high relative to the business's historical pattern, the buyer inherits obligations that were not visible in the EBITDA. Review payable aging and compare to historical averages.

Normalized EBITDA verification. Request documentation for every add-back on the seller's EBITDA schedule. Owner compensation: W-2s or K-1s. Personal expenses: invoices and bank statements. One-time expenses: invoices and explanation of why they are non-recurring. Depreciation and amortization: match to the asset register and depreciation schedule. Undocumented add-backs should be excluded from your underwriting.

Legal and Corporate Diligence

Legal diligence verifies the seller's authority to sell the business, identifies any pending liabilities, and confirms that contracts and licenses will transfer to the new owner.

Corporate entity review. Confirm the legal entity structure (C corp, S corp, LLC, partnership), state of formation, and good standing. Obtain the articles of incorporation/organization, operating agreement or bylaws, and all amendments. Confirm there are no unauthorized equity interests, phantom equity programs, or undisclosed ownership claims.

Lien search. Search for UCC financing statements, tax liens, and judgment liens filed against the business. Liens against business assets must be resolved before or at close — a buyer who inherits a UCC lien does not get clean title to the collateral.

Litigation history. Request a full disclosure of any past, pending, or threatened litigation. Lawsuits that were settled in prior years may still have ongoing confidentiality or settlement payment obligations. Employment lawsuits are particularly common in service businesses and may signal workforce management issues.

Contract review. Identify all material contracts: customer agreements, vendor agreements, equipment leases, real property leases, software licenses, and professional service agreements. For each, confirm: (1) Can the contract be assigned to a new owner, or does it require consent? (2) Is there a change-of-control provision that allows the counterparty to terminate? (3) What is the remaining term?

Lease review. Commercial lease assignment is often a closing condition for SBA-financed acquisitions. Confirm the lease term (should extend at least 3–5 years post-close to avoid business disruption), confirm assignment rights, and initiate landlord consent conversations early. Landlords have significant leverage over acquisition timelines when they must consent to assignment.

Intellectual property. Confirm that trademarks, domain names, and proprietary technology are owned by the business entity being sold (not by the individual owner personally), are properly registered, and will transfer with the sale.

Operational and Customer Diligence

Operational diligence assesses whether the business can continue to perform at the represented level under new ownership. Customer diligence specifically evaluates the durability of the revenue base.

Customer concentration analysis. Generate a complete customer list with revenue by customer for each of the past three years. Calculate each customer's percentage of total revenue. Identify any customer representing more than 10% of revenue and develop a specific assessment of that relationship's durability post-close: is it contract-based or relationship-based? Is it the selling owner's personal relationship? Has there been any discussion with the customer about the sale?

Customer reference calls. If the seller permits (many require confidentiality until post-LOI), speak directly with two or three key customers. Do not ask about the acquisition directly — ask about their satisfaction with the service, whether they anticipate continued use of the business, and what they value about the relationship. This is the most direct test of customer durability.

Revenue cohort analysis. Request a customer-level revenue history going back three years. Identify which customers are new in the trailing 12 months, which have been consistent over three years, and which have reduced purchases. Cohort analysis reveals revenue quality issues that a P&L summary conceals.

Operations documentation review. Does the business have documented operating procedures, training materials, and process documentation? For businesses that depend on the selling owner's personal knowledge and relationships, the absence of documentation creates transition risk. The more documented the operations, the lower the key-person risk.

Technology and systems review. What software platforms run the business? Are they owned or licensed? Are there integrations with customer systems that need to transfer? Are licenses in the business's name or the owner's personal name? Technology due diligence is increasingly important as more business operations depend on integrated software platforms.

HR and Employment Diligence

Employment due diligence is one of the most commonly under-resourced diligence areas in small business acquisitions — and one of the most frequent sources of post-close surprises.

Employee census review. Obtain a full employee roster with role, tenure, compensation, benefit participation, and employment classification (W-2 employee vs. independent contractor). Verify that the business has maintained required employment records and has properly classified workers.

Independent contractor classification. Misclassification of workers as independent contractors when they should be employees is common in small businesses. The liability exposure — back payroll taxes, penalties, and potential class action claims — can be significant. If the business uses ICs extensively, engage employment counsel to assess misclassification risk before closing.

Key person identification. Who are the one to three employees whose departure would most damage the business? Are they under employment agreements? Do those agreements have non-solicitation or non-compete provisions that survive the sale? If key employees are not under any agreement, the buyer should negotiate retention agreements as a closing condition.

Benefits and obligations review. Review all employee benefit plans: health insurance, retirement plans (401(k) plan documents and recent compliance testing), paid time off accruals, and any deferred compensation arrangements. Accrued PTO is a liability that transfers in an asset sale only if explicitly assumed.

Workers' compensation claims history. A high-frequency workers' comp claims history suggests operational safety issues and may affect post-close insurance premiums. Review the three-year claims history and any open claims.

Industry-Specific Diligence: Healthcare and Professional Services

Regulated industries require additional diligence beyond the standard framework. The following issues apply specifically to healthcare practices and professional services firms.

Healthcare practices (dental, physical therapy, home health, behavioral health): - Medicare and Medicaid enrollment status, open audits, and billing history - State licensure — current status, survey history, pending complaints - Payer credentialing for all clinical staff — confirm all providers are actively credentialed with major payers - CMS change of ownership (CHOW) implications — stock vs. asset sale determination - DEA registration status if controlled substances are prescribed - HIPAA compliance documentation — privacy policies, security policies, breach history - Malpractice claims history for the past five years

Professional services firms (engineering, accounting, law, consulting): - Professional license status of all licensed staff — current, no pending disciplinary actions - State licensing board change-of-ownership requirements - Client contract review for assignment provisions — many professional service contracts require client consent for transfer - Errors and omissions (E&O) insurance history — open claims, expiring coverage - Quality control documentation and professional standards compliance

For industry-specific diligence guides, see the acquisition checklists for dental practices, home health agencies, engineering firms, physical therapy clinics, and behavioral health practices.

The Complete Small Business Due Diligence Request List

The following is a comprehensive document request list for a standard small business acquisition. Organized by category, this list covers the full scope of standard diligence. Industry-specific items supplement this base list.

• Federal business tax returns for the past 3 years (all schedules and attachments)
• Monthly P&L statements for the past 3 years and current year-to-date
• Balance sheet as of the most recent month-end and as of the last fiscal year-end
• Accounts receivable aging report as of a recent date
• Accounts payable aging report as of a recent date
• Bank statements for all business accounts for the past 12 months
• Normalized EBITDA / SDE schedule with documentation for each add-back
• Customer list with revenue by customer for the past 3 years
• All material customer contracts (top 10 customers by revenue)
• All equipment leases, equipment loans, and vehicle titles/registrations
• Real property lease — all amendments, options, and assignment provisions
• Articles of incorporation/organization, operating agreement or bylaws, all amendments
• Capitalization table — all equity owners, percentages, and any options or warrants
• UCC and lien search results (buyer typically orders; seller should disclose known liens)
• Litigation history — past and pending lawsuits, settlements, and judgments
• Employee census — roster with compensation, tenure, role, and classification
• Independent contractor agreements for any workers classified as ICs
• Key employee agreements (employment agreements, non-solicitation, non-competes)
• Business insurance policies — general liability, E&O, workers' comp, key-man
• Workers' compensation claims history for past 3 years
• Any government notices, audits, or correspondence from regulatory agencies
• List of all licenses, permits, and registrations required to operate the business

Frequently Asked Questions