How to buy a business: a due diligence checklist

Published Monday 8 June 2026

Table of contents

• What is due diligence when buying a business?
• Why is due diligence important?
• Steps to buying a business
• Essential due diligence checklists
• How to value a business
• How to finance a business acquisition
• Key documents to review during due diligence
• Benefits and risks of buying a business
• Tips for doing your due diligence right
• Set up your new business with Xero
• FAQs on buying a business

Key takeaways

• Due diligence is a thorough investigation of a business's finances, legal standing, operations, and market position before you commit to buying it.
• Skipping or rushing due diligence can lead to hidden liabilities, overpaid valuations, and regulatory problems that cost far more than the purchase price.
• Your due diligence checklist should cover five key areas: financial health, legal compliance, operational systems, market position, and regulatory obligations.
• Professional advisors such as accountants, lawyers, and business brokers help you catch risks you might miss on your own.

What is due diligence when buying a business?

Due diligence is the process of investigating a business before you agree to buy it. It helps you confirm that the business is what the seller claims it to be.

In practice, due diligence means reviewing a business's financial records, legal standing, operations, and market position. You analyse whether the business has measurable commercial potential and aligns with your goals. Think of it as your pre-purchase checklist that gives you the confidence to proceed, renegotiate, or walk away. Weighing up whether to buy or build? The starting a business checklist covers what it takes to launch from scratch.

Why is due diligence important?

Due diligence protects you from paying too much for a business or inheriting problems you didn't know about. It's your responsibility as the buyer to verify every detail the seller provides.

Research from Bain & Company found that up to 30% of acquisitions fail to deliver their expected value, with inadequate due diligence often a contributing factor.

Without thorough due diligence, you risk missing:

• Hidden liabilities or overstated earnings
• Unreported debts, tax problems, or unreliable revenue sources
• Legal issues or regulatory non-compliance that could lead to fines or closure
• Operational inefficiencies, outdated systems, or fragile supplier and customer relationships
• Reputational issues or market weaknesses

Getting expert advice from your accountant and lawyer is well worth the investment, especially for financial and legal matters.

Steps to buying a business

Buying a business involves several stages, from finding the right opportunity to completing the deal. Here are the 7 key steps to follow.

1. Define what you want to buy

Before you start searching, clarify your goals. Consider the industry, size, location, and type of business that suits your skills and budget.

Ask yourself what you want from the acquisition. Are you looking for an existing customer base, a specific product, or a foothold in a new market? Setting clear criteria saves time and helps you focus on realistic opportunities.

2. Find businesses for sale

There are several ways to find businesses available for purchase.

• Business brokers who specialise in matching buyers with sellers
• Online business-for-sale marketplaces
• Industry contacts and professional networks
• Accountants and lawyers who may know of businesses coming to market

A broker can help you identify opportunities that match your criteria and handle early negotiations on your behalf.

3. Evaluate and value the business

Once you find a potential business, assess whether it is worth the asking price. Review the financial statements, customer base, and market position to form your own view of its value.

Common valuation methods include asset-based valuation, earnings multiples, and market comparison. For a deeper look at six valuation methods with examples, see the how to value a business guide.

4. Do your due diligence

This is the most critical step. Use the due diligence checklists in this guide to investigate the business's finances, legal standing, operations, market position, and regulatory compliance.

Take your time. Proper due diligence takes weeks or even months, depending on the size and complexity of the business. Rushing this step is the most common mistake buyers make.

5. Secure financing

Work out how you will fund the purchase before you enter final negotiations. Your options may include bank loans, seller financing, personal savings, or investor funding.

See the how to finance a business acquisition section below for a breakdown of common funding options.

6. Negotiate and close the deal

Use your due diligence findings to negotiate the purchase price and terms. If you uncovered risks, you may be able to negotiate a lower price or include protective clauses in the contract.

Your lawyer should draft or review the purchase agreement. This document covers the sale price, payment terms, warranties, and any conditions that must be met before settlement.

7. Transition into ownership

After settlement, focus on a smooth handover. Meet key staff, suppliers, and customers early. Review existing systems and processes so you understand how the business runs day to day.

Setting up reliable accounting software from the start helps you track cash flow, manage invoices, and stay on top of your finances during the transition.

Essential due diligence checklists

These checklists cover the areas you need to investigate before buying a business. Get professional advice from a lawyer and your financial advisor for the details specific to your situation.

Financial due diligence

The financial checklist covers the business's financial health and performance.

• Review 3 to 5 years of tax returns, financial statements, cash flow records, sales figures, profit and loss statements, and assets
• Confirm the business's tax compliance and liabilities
• Check for outstanding debts and liabilities
• Analyse cash flow to get an accurate picture of growth potential
• Investigate revenue trends and projections for the industry

Legal due diligence

The legal checklist covers the company's legal standing, including any current or past litigation.

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

Operational due diligence

The operational checklist covers all aspects of business continuity.

• Review business plans and strategy documents
• Evaluate 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 repair needs
• Examine technology infrastructure, data security, and software systems to confirm they are current, secure, and scalable

Market position and competitive analysis

This checklist helps you understand how the business competes and where it sits in its market.

• Review market strategy plans and performance reports
• Check the business's online presence, including search rankings, advertising, and marketing campaigns
• Perform a competitor analysis to understand challenges, opportunities, and market strength
• Evaluate how the business reaches its customers and measure customer loyalty
• Review customer records, feedback, and reviews

Regulatory and compliance

Laws and regulations vary by industry and region. This checklist examines regulatory challenges and whether the business meets its 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
• Review compliance with workplace conditions, agreements, and employee entitlements
• Investigate whether the business follows environmental regulations and check potential liabilities in areas like waste management and pollution

How to value a business

Valuing a business means estimating what it is worth based on its assets, earnings, and market position. There's no single correct method, so most buyers use a combination of approaches.

Asset-based valuation

This method calculates the value of the business based on its total assets minus its liabilities. It works best for businesses with significant physical assets such as property, equipment, or stock.

Add up the fair market value of all assets, then subtract outstanding debts and obligations. The result is the net asset value. This approach may undervalue businesses that rely on intangible assets like brand reputation or customer relationships.

Earnings multiple

This method values the business based on its ability to generate profit. You multiply the business's annual earnings (usually earnings before interest and tax) by a standard industry multiple.

The multiple varies by industry, size, and growth potential. A business with stable, predictable earnings typically commands a higher multiple. Ask your accountant or broker which multiples are common in your sector.

Market comparison

This method compares the business to similar businesses that have recently sold. It gives you a benchmark based on actual market transactions.

Look at sale prices for comparable businesses in the same industry, region, and size bracket. A business broker can help you find relevant comparison data. Keep in mind that no two businesses are identical, so adjust for differences in performance, location, and growth prospects.

How to finance a business acquisition

Most buyers use a combination of funding sources to finance a business purchase. The right mix depends on the size of the deal, your financial position, and the terms the seller accepts.

Bank loans

A business acquisition loan from a bank is one of the most common funding options. You'll need to provide a solid business plan, financial projections, and evidence of the business's profitability.

Banks typically require collateral and may fund 50 to 70% of the purchase price. Interest rates and terms vary, so compare offers from several lenders before committing.

Seller financing

In a seller-financed deal, the seller agrees to receive part of the purchase price over time rather than in a single payment. This can make the acquisition more affordable upfront.

Seller financing shows that the seller has confidence in the business's future performance. It also gives you time to generate revenue from the business before the full amount is due.

Personal funds

Using your own savings reduces your reliance on external lenders and avoids interest costs. However, putting all your personal funds into one acquisition carries risk.

Consider how much of your savings you can commit. You need enough left over for living expenses and unexpected costs during the transition.

Investor funding

You may bring in partners or investors who contribute capital in exchange for equity or a share of profits. This spreads the financial risk but means sharing ownership and decision-making.

Be clear about expectations, roles, and exit terms from the start. A formal shareholders' agreement protects everyone involved.

Key documents to review during due diligence

To complete your due diligence properly, you need to collect and review the business's financial records, contracts, legal documentation, sales reports, and customer records. The documents you need may vary depending on the industry and location. Get help from an accountant, lawyer, or broker to make sure you cover everything.

Financial and tax

Review these financial and tax records before completing the purchase.

• Tax returns (3 to 5 years)
• Profit and loss statements (3 to 5 years)
• Balance sheets (3 to 5 years)
• Audit reports
• Business credit reports
• Bank loans or other finance
• Leases

You should also review sales records and any existing business valuations.

Equipment, assets, and stock

Check the status and ownership of all physical and leased assets.

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

Legal

Examine these legal documents to identify obligations and risks.

• 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

Check data management processes as well, especially if the business handles personal customer data.

Operations

Gather these operational records to understand how the business runs day to day.

• 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
• Marketing campaign strategy documents

Intellectual property

Confirm the status and ownership of all intellectual property assets.

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

Benefits and risks of buying a business

Buying an existing business has clear advantages over starting from scratch, but it also carries risks you need to plan for.

Benefits

An established business gives you a head start that a new venture cannot match.

• You inherit an established customer base, brand reputation, and existing revenue streams.
• Operational systems, supplier relationships, and staff are already in place.
• You skip the high start-up costs of finding premises, employees, and stock.
• A proven business concept and existing cash flow may make it easier to secure financing.
• According to SBA data, acquired businesses have a 5-year survival rate of 70 to 80%, compared with roughly 50% for newly started businesses.

Risks

Even with thorough due diligence, buying a business comes with risks you should weigh carefully.

• Hidden debts, legal disputes, or tax problems may only surface after the sale.
• The business culture or management style may not align with your own.
• Key staff or customers may leave during or after the ownership transition.
• Outdated technology or processes may require significant investment to update.
• You may overpay if the valuation is based on inflated projections rather than actual performance.

Thorough due diligence, professional advice, and a realistic transition plan reduce these risks significantly.

Tips for doing your due diligence right

Proper business due diligence takes patience, care, and an expert eye. These tips help you avoid the most common mistakes.

• Take your time: proper due diligence takes weeks or months, depending on the size and complexity of the business. Rushing the process is the most common mistake buyers make.
• Get expert advice from your accountant, lawyer, and broker. The cost of missing something important far outweighs the fees for professional help.
• Have financial and legal experts draft or review the purchase agreement and guide you through the technical details. You can find financial advisors in the Xero advisor directory.
• Think about the operational and cultural aspects of the business. Ideally, the existing culture aligns with your values, goals, and management style. Understanding the seller's perspective through succession planning can also help you negotiate better terms.
• Verify every claim the seller makes. Cross-check financial statements, customer records, and contracts independently.

Set up your new business with Xero

Once the deal is done, your focus shifts to running the business. Getting your finances organised from day one makes the transition smoother and gives you a clear picture of cash flow, expenses, and profitability.

Xero's cloud accounting software helps you manage invoices, track expenses, and reconcile bank transactions in one place. You can connect your bank accounts and start processing transactions straight away, so you spend less time on admin and more time growing your new business. Get one month free.

FAQs on buying a business

Here are answers to frequently asked questions about buying a business.

What are the advantages of buying a business?

You inherit an established customer base, brand reputation, revenue streams, and operational systems. You skip much of the cost and effort of building a business from scratch. According to SBA data, acquired businesses have a 5-year survival rate of 70 to 80%, compared with roughly 50% for new start-ups.

What is the difference between an asset purchase and a share purchase?

In an asset purchase, you buy specific assets of the business such as equipment, stock, and customer contracts. In a share purchase, you buy the company's shares and take ownership of the entire entity, including its liabilities. Your lawyer and accountant can advise which structure suits your situation.

How long does the due diligence process take?

Due diligence typically takes 4 to 12 weeks, depending on the size and complexity of the business. Larger or more complex acquisitions may take longer. Rushing this step is the most common mistake buyers make, so allow enough time to investigate thoroughly.

Do you need a lawyer to buy a business?

You're not legally required to hire a lawyer, but it's strongly recommended. A lawyer reviews contracts, identifies legal risks, and drafts or reviews the purchase agreement. The cost of legal advice is small compared with the potential cost of missing a legal issue.

How do you find businesses for sale?

You can find businesses for sale through business brokers, online marketplaces, industry contacts, and professional networks. Accountants and lawyers may also know of businesses coming to market. A broker can match you with opportunities that fit your criteria and budget.