Due diligence checklist for buying a business

Published Tuesday 3 February 2026

Table of contents

• What is due diligence when buying a business?
• Why is due diligence important?
• When does the due diligence period start?
• Essential due diligence checklists before buying a business
• Key documents to review during due diligence
• Common red flags during due diligence
• How to conduct due diligence: step-by-step
• Set up your new business for success with Xero
• FAQs on buying a business

Key takeaways

• Allocate 30 to 90 days for thorough due diligence and hire professional advisors including an accountant, lawyer, and business broker to avoid costly mistakes that could devastate your investment.
• Focus your investigation on five critical areas: financial health, legal standing, operations, market position, and regulatory compliance to uncover hidden risks before you buy.
• Watch for major red flags like declining revenue over multiple years, pending litigation, high employee turnover, or customer concentration where one client represents more than 25% of revenue.
• Use problems you discover during due diligence as leverage to renegotiate the purchase price, request fixes before closing, or walk away entirely if you find fraud or undisclosed major liabilities.

Key takeaways

• Due diligence is your responsibility as the buyer and protects you from hidden problems after the sale
• Focus on five key areas: financial health, legal standing, operations, market position, and regulatory compliance
• The process typically takes 30 to 90 days depending on business complexity
• Work with professional advisors including an accountant, lawyer, and business broker
• Watch for red flags like declining revenue, pending litigation, or high employee turnover
• Finding problems during due diligence gives you leverage to renegotiate or walk away

What is due diligence when buying a business?

Whether you plan to buy an online business, small business, or company, don't skip the due diligence.

Due diligence is the research and verification process you complete before buying a business. It confirms the business is what it claims to be and fits your goals. This is crucial, as the SEC has observed that marketing materials can contain unsubstantiated statements about the seller's own diligence.

Why is due diligence important?

Due diligence protects you from costly surprises after you sign the deal. While sellers must accurately represent their business, verifying those details is your responsibility. For example, for tax purposes, the IRS states the residual method must be used to allocate the purchase price among the business assets.

A thorough due diligence checklist helps you uncover hidden risks, confirm you're paying a fair price, and check for regulatory compliance. Without it, you risk missing:

• Hidden financial problems: overstated earnings, unreported debts, or unreliable revenue sources
• Tax liabilities: unpaid taxes or compliance issues that transfer to you
• Legal risks: pending litigation, regulatory violations, or potential fines
• Operational weaknesses: outdated systems, inefficient processes, or fragile supplier relationships
• Reputation and market issues: negative reviews, declining customer base, or weak competitive position

When does the due diligence period start?

The due diligence period typically begins after you sign a letter of intent (LOI) or preliminary purchase agreement with the seller. This document outlines the proposed terms and gives you access to investigate the business.

Most due diligence periods last 30 to 90 days, depending on:

• Business complexity: Larger businesses with more locations, employees, or product lines take longer to review
• Document availability: Organized sellers with ready documentation speed up the process
• Industry requirements: Regulated industries may require additional compliance checks
• Your resources: Working with experienced advisors can accelerate the timeline

The period ends when you either proceed to closing, renegotiate terms based on your findings, or walk away from the deal. Build buffer time into your timeline for unexpected discoveries.

Essential due diligence checklists before buying a business

Business due diligence covers five key areas: financial health, legal standing, operations, market position, and regulatory compliance. Each area has specific items to review and verify.

The checklists below guide you through what to investigate. Get professional advice from a lawyer and financial advisor for details specific to your situation.

Financial due diligence

Financial due diligence examines the business's financial health and verifies the numbers the seller presents. This is often the most critical part of your investigation.

• Review three to five years of tax returns and profit and loss statements. For certain regulated acquisitions, SEC rules require financial statements of the acquired business to cover no more than the two most recent fiscal years.
• Verify tax compliance status and identify any outstanding tax liabilities
• Check for debts, loans, and other financial obligations
• Analyze cash flow patterns to assess growth potential and stability
• Investigate revenue trends and compare them to industry projections

Legal due diligence

Legal due diligence confirms the business has proper legal standing and identifies any legal risks that could affect your purchase.

• Review all contracts, including supplier agreements, customer contracts, employee agreements, and leases. If the business works with the government, this is especially vital, as federal agencies award contracts worth over $300 billion annually.
• Verify intellectual property ownership for patents, trademarks, copyrights, and trade secrets
• Confirm business name registration, domain ownership, and trademark status
• Investigate past or pending litigation, lawsuits, or regulatory disputes

Operational due diligence

Operational due diligence evaluates how the business runs day-to-day and whether it can continue operating smoothly after the sale.

• Review business plans, strategy documents, and organizational structure
• Evaluate management capabilities, staffing levels, and employee retention
• Assess customer relationships, supplier contracts, and key dependencies
• Inspect equipment and assets for age, condition, and maintenance needs
• Examine technology systems, data security practices, and software scalability

Market position and competitive analysis

Market due diligence helps you understand the business's true value and competitive position. This prevents you from overpaying for a business with limited growth potential.

You'll examine how the business reaches customers, where it stands against competitors, and what opportunities exist for growth.

• 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, opportunities, and market strength
• Evaluate how the business reaches its customer base, and customer loyalty
• Review customer records, feedback, and reviews

Regulatory and compliance

Regulatory due diligence confirms the business meets all legal obligations and industry-specific requirements. Laws vary by industry and location, so complete this step to avoid compliance surprises.

• Review regulatory and compliance obligations specific to the industry
• Check for issues related to licenses, permits, premises, or government regulations
• Review tax compliance status, including tax records, liabilities, and compliance with local and international tax laws
• Review compliance with workplace conditions, agreements, and employee entitlements
• Investigate whether the business follows environmental regulations. Check its potential liabilities in areas like waste management, pollution, and hazardous materials

Key documents to review during due diligence

You'll need to collect and review key business documents across five categories: financial records, equipment and assets, legal documents, operations, and intellectual property.

The specific documents vary by industry and location. Work with an accountant, lawyer, or broker to make sure you've covered everything relevant to your purchase.

Financial and tax

• Tax returns (three–five years)
• Profit and loss statements (three–five years)
• Balance sheets (three–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 licenses

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
• Licenses 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

Common red flags during due diligence

Red flags are warning signs that indicate serious problems with the business you're considering. Some issues can be resolved through negotiation, while others should make you walk away.

Financial red flags

• Declining revenue: Consistent drops in sales over two to three years signal deeper problems
• Customer concentration: If one customer accounts for more than 25% of revenue, losing them could devastate the business
• Irregular accounting: Missing records, inconsistent bookkeeping, or reluctance to share financials. In one compliance alert, the SEC staff identified instances where advisors did not maintain a record of key decisions as required by regulations.
• Unexplained cash transactions: Large cash payments without documentation may indicate unreported income or fraud

Legal red flags

• Pending litigation: Active lawsuits could result in significant financial liability
• Expired licenses or permits: Operating without proper authorization creates immediate compliance risk
• Intellectual property disputes: Unclear ownership of trademarks, patents, or proprietary processes
• Environmental violations: Past or current violations can transfer liability to you

Operational red flags

• High employee turnover: Frequent staff departures may indicate management problems or poor culture
• Key person dependency: If the business relies heavily on the owner or one employee, value may drop after the sale
• Outdated technology: Systems that need immediate replacement add unexpected costs
• Supplier concentration: Depending on a single supplier creates risk if that relationship ends

When to walk away

Consider walking away if you discover undisclosed debts, evidence of fraud, or problems the seller actively concealed. Trust your instincts and your advisors. A bad deal avoided is better than a costly mistake.

How to conduct due diligence: step-by-step

Follow these steps to conduct thorough due diligence and avoid costly mistakes.

1. Allow enough time: Due diligence takes weeks or months depending on business size and complexity. Rushing is the most common mistake buyers make.
2. Hire professional advisors: Work with an accountant, lawyer, and business broker. The cost of expert help is far less than the cost of missing critical issues. Find advisors in the advisor directory.
3. Request all documents early: Ask the seller for financial records, contracts, and operational documents at the start. Missing documents can delay the process or signal problems.
4. Verify everything independently: Don't rely solely on seller-provided information. Cross-check financials, confirm customer relationships, and validate key claims.
5. Assess cultural fit: Consider whether the business's culture, values, and management style align with yours. Cultural mismatches can create challenges after the sale.

Set up your new business for success with Xero

Once you've completed due diligence and closed the deal, you'll want clear visibility into your new business's finances from day one.

Xero helps you track cash flow, process transactions, and spot growth opportunities. With real-time financial insights, you can make confident decisions as you take over operations.

Get one month free and see how Xero supports your business.

FAQs on buying a business

Here are answers to common questions about the due diligence process and buying a business.

How long does the due diligence process typically take?

Most due diligence periods last 30 to 90 days. Smaller businesses with organized records may take four to six weeks, while larger or more complex acquisitions can take three months or longer.

How much should I budget for due diligence?

Costs depend on how much professional help you need. Budget for legal, accounting, and potentially other expert fees. These costs are an investment in making a confident and informed decision.

Can I conduct due diligence myself or do I need professionals?

While you can do some research yourself, it's wise to hire professionals. An accountant can verify financial records, and a lawyer can review legal documents and contracts. Their expertise helps you avoid costly mistakes.

What if I discover problems during due diligence?

Finding problems doesn't always mean walking away. You can renegotiate the purchase price, request the seller fix issues before closing, or add protective clauses to the contract. Only walk away if you discover fraud, undisclosed major liabilities, or problems that fundamentally change the business's value.

What are the advantages of buying a business?

Buying an existing business gives you a head start compared to starting from scratch. Key advantages include:

• Established customer base: You inherit existing customers, revenue streams, and brand reputation
• Operational systems in place: You inherit supplier relationships, processes, and employees that are already working
• Proven business model: You benefit from a tested concept, reducing your risk compared to a new venture
• Easier financing: You may find it easier to get loans, as lenders often prefer established businesses with track records

How do I buy a business in the USA?

Buying a business in the USA requires specific documentation and compliance checks. Key documents include:

• Letter of intent and confidentiality agreement
• Financial statements and tax returns (three to five years)
• Sales agreement with purchase price terms
• All contracts and leases

You'll also need to research state-specific tax rules, required licenses and permits, zoning requirements, and environmental regulations. Get professional advice from an accountant or lawyer familiar with your state's requirements.

• US government guidance on buying an existing business