Buying a business: due diligence checklist and expert steps

Published Monday 26 January 2026

Table of contents

• What is due diligence when buying a business?
• Why is due diligence important?
• How to buy a business: key steps overview
• Essential due diligence checklists before buying a business
• Key documents to review during due diligence
• How to conduct effective due diligence
• Grow your new business with Xero
• FAQs on buying a business

Key takeaways

• Conduct thorough due diligence across five critical areas—financial, legal, operational, market position, and regulatory compliance—to verify the seller's claims and uncover potential risks before finalizing your purchase.
• Assemble a team of professional advisors including accountants, lawyers, and business brokers to guide you through complex financial and legal aspects that you might miss on your own.
• Review three to five years of financial statements, tax returns, and cash flow records to confirm the business generates the revenue and profits the seller claims and assess its true growth potential.
• Allow adequate time for the due diligence process, planning for weeks or months depending on business complexity, to ensure you don't rush into costly mistakes or overlook critical issues.

What is due diligence when buying a business?

Due diligence is your comprehensive investigation and verification process before buying a business. It's the practical research that confirms the business is what it claims to be, has real commercial potential, and matches your investment goals.

This process gives you the confidence to move forward with the purchase, negotiate better terms, or walk away entirely. Whether you're buying an online business, small local company, or larger enterprise, due diligence protects your investment.

Why is due diligence important?

Due diligence protects you from costly mistakes and ensures you pay a fair price for a viable business. As the buyer, you're responsible for verifying everything the seller claims.

Thorough due diligence helps you avoid expensive surprises after closing:

• Financial risks: Issues such as undisclosed liabilities, overstated earnings, or unreported debts
• Legal problems: Regulatory non-compliance, pending lawsuits, or tax issues
• Operational issues: Outdated systems, weak supplier relationships, or inefficient processes
• Market challenges: Hidden reputational problems or declining market position

Seek expert advice on your due diligence checklist, especially for legal and financial matters.

How to buy a business: key steps overview

Buying a business is a big step, but breaking the process down makes it much more manageable. While every purchase is unique, you can follow a general roadmap to guide you. Here's an overview of the key steps you'll likely take.

1. Define your goals and find the right business. Start by figuring out what you want from a business, including the industry, size, and location. Then, you can search for businesses for sale through brokers, online marketplaces, and your professional network.
2. Assess the business and make an offer. Once you find a promising business, you'll do an initial assessment of its value and potential. If it looks like a good fit, you'll work with your advisors to prepare and submit a letter of intent or an initial offer.
3. Conduct due diligence. This is where you dig into the details. As this guide shows, you'll thoroughly investigate the business's financials, legal standing, and operations to confirm its value and uncover any potential risks.
4. Secure financing. Unless you're paying with cash, you'll need to secure funding. This could involve applying for a business loan, seeking investors, or negotiating seller financing.
5. Finalize the deal. With financing in place and due diligence complete, your lawyer will help you draft and negotiate the final purchase agreement. This legal document outlines all the terms and conditions of the sale.
6. Manage the transition. After the sale is closed, the work of transitioning ownership begins. This includes transferring licences, communicating with employees and customers, and setting up your new systems.

Essential due diligence checklists before buying a business

These due diligence checklists cover the five critical areas that determine whether a business is worth buying. Each checklist helps you verify different aspects of the business's value and risks.

Work with a lawyer and financial advisor to ensure you don't miss important details specific to your industry or location.

Financial due diligence

Financial due diligence verifies the business's true profitability, cash flow, and financial stability. This process confirms the business generates the revenue and profits the seller claims.

• Review three to five years of the business's tax returns and financial statements, cash flow records and sales figures, profit and loss statements, and assets. When reviewing assets, it helps to understand relevant tax laws, such as the 2017 replacement of the eligible capital property system with the new capital cost allowance (CCA) Class 14.1.
• Confirm the business's tax compliance and liabilities.
• Check for outstanding debts and liabilities.
• Analyze the business cash flow to get an accurate picture of its growth potential.
• Investigate revenue trends and projections for the industry.

Legal due diligence

Legal due diligence protects you from inheriting legal problems and ensures all contracts and licenses transfer properly. This process uncovers any legal risks that could affect your ownership or operations.

• Review all contracts and licences, including supply, customer, operational, and employee contracts, leases, and any other agreements.
• Check for intellectual property rights to gauge the value and risks associated with patents, trademarks, copyrights, or trade secrets.
• Check for business name registration, domain registration, and trademarks or brands.
• Investigate past or pending litigation, lawsuits, or other legal issues facing the business.

Operational due diligence

Operational due diligence evaluates whether the business can continue running smoothly after you take over. This process examines the systems, processes, and relationships that keep the business profitable.

• Review business plans and strategy documents.
• Evaluate the business's operations and processes, including management structures, staffing, and human resources.
• Assess customer and supplier relationships and contracts.
• Review business assets and equipment, considering their age, maintenance schedules, and anything needing repair.
• Examine the business technology infrastructure, data security, and software systems to make sure they're up to date, secure, and scalable.

Market position and competitive analysis

Market position and competitive analysis determines whether the business can compete effectively and grow in its market. This analysis prevents you from overpaying for a business with limited growth potential or strong competitive threats.

• Review market strategy plans and performance reports.
• Check out the business's online presence, including search rankings, its existing ad buys, and other marketing campaigns.
• Perform a competitor analysis to understand the business's challenges and opportunities, and the strength of the business in its market.
• Evaluate how the business reaches its customer base, and customer loyalty.
• Review customer records, feedback, and reviews.

Regulatory and compliance

Regulatory and compliance due diligence protects you from fines, penalties, and forced business closure. This process verifies the business meets all industry-specific regulations, licensing requirements, and government obligations.

• Review regulatory and compliance obligations specific to the industry.
• Check for issues related to licences, permits, premises, or government regulations.
• Review tax compliance status, including tax records, liabilities, and compliance with local and international tax laws. For instance, the Canada Revenue Agency notes that if you acquire at least 90% of the property needed to run the business, you and the seller may be able to elect to have no Goods and Services Tax (GST) or Harmonized Sales Tax (HST) payable on the sale.
• Review compliance with workplace conditions, agreements, and employee entitlements.
• Investigate whether the business follows environmental regulations, and check its potential liabilities in areas like waste management, pollution, and hazardous materials.

Key documents to review during due diligence

Document review gives you the evidence needed to verify every claim the seller makes about the business. The specific documents you'll need depend on your industry and location.

Work with an accountant, lawyer, or business broker to ensure you collect all necessary documentation. Complete and accurate documents give you confidence there are no gaps or hidden issues.

Financial and tax

• Tax returns for the past three to five years
• Profit and loss statements for the past three to five years
• Balance sheets for the past three to five years
• Audit reports
• Business credit reports
• Bank loans or other finance
• Leases
• Sales records
• Business valuation(s)

Equipment, assets, and stock

• Plant, equipment, or vehicle leases
• Maintenance records
• Other assets owned or leased
• Outstanding debts to suppliers
• Stock
• Software licences

Legal

• Insurance contracts
• Regulations or compliance issues
• Legal proceedings
• Mandatory codes of practice
• Business standards and procedures
• Legal agreements for directors, partners, or shareholders
• Privacy requirements
• Data management processes

Operations

• Business plans and other strategy documents
• Staff contracts, awards, entitlements, and insurances
• Staff induction and training records
• Licences and permits required to run the business
• Policies and procedures
• Supplier contracts
• Voluntary codes of conduct
• Minutes of management meetings
• Marketing campaign strategy documents
• Branding strategy and guidelines

Intellectual property

• Trademarks
• Patents
• Copyright
• Branding
• Registered designs
• Business registration
• Domain registration

How to conduct effective due diligence

Effective due diligence reduces your investment risk and ensures you make informed decisions about the business purchase. Here's how to conduct thorough due diligence:

1. Allow adequate time: Plan for weeks or months depending on the business size and complexity
2. Get expert help: Work with accountants, lawyers, and brokers who can catch what you might miss
3. Consider cultural fit: Ensure the business culture aligns with your values and management style

You'll also need financial experts to draft the purchase agreement and guide you through finance and legal technicalities. You can find financial advisors in our advisor directory.

Grow your new business with Xero

Now that you've successfully acquired your business, focus on growth and efficient financial management. Xero's cloud-based accounting software helps you track your new business's performance, manage cash flow, and identify growth opportunities.

See how businesses of all types use Xero to streamline their financial operations and make data-based decisions. Start your free trial today.

FAQs on buying a business

How do I buy a business in Canada?

Buying a business in Canada follows a structured legal process with specific regulatory requirements. After signing a letter of intent, you'll conduct due diligence while navigating federal, provincial, and municipal regulations.

You'll need to secure all required permits and licences before taking ownership. Work with Canadian legal and financial professionals to ensure compliance with local tax rules and business regulations.

Here's more information:

• Advice from BDC on buying an existing business in Canada
• Canadian government advice on buying an existing business in Canada

What are the advantages of buying a business?

Buying an existing business reduces startup risk and accelerates your path to profitability compared to starting from scratch.

Key advantages include:

• Immediate revenue: Established customer base and proven income streams
• Reduced setup costs: Existing location, equipment, staff, and supplier relationships
• Proven concept: Track record of success and established brand recognition
• Easier financing: Banks prefer lending to established businesses with financial history

Is it worth buying an existing business?

Buying an existing business is often considered less risky than starting one from the ground up. An established business comes with a proven track record, an existing customer base, and operational systems already in place. You also get the benefit of immediate cash flow, which can make the early days of ownership much smoother.

How much does it usually cost to buy a business?

The cost of buying a business varies widely depending on its industry, size, location, and financial health, so prices can range from modest to very high. The final price is typically based on a valuation that considers assets, revenue, and profitability.

It's a good idea to work with an accountant or business broker to understand what a fair price might be for the type of business you're interested in.