Due diligence checklist for buying a business | Xero

Published Thursday 2 April 2026

Table of contents

• What is due diligence when buying a business?
• Why is due diligence important?
• Types of due diligence
• Essential due diligence checklists before buying a business
• Key documents to review during due diligence
• How to conduct due diligence
• Do your due diligence right
• Grow your new business with Xero
• FAQs on buying a business

Key takeaways

• Assemble a professional team including an accountant, lawyer, and possibly a business broker early in the process, as their expertise helps you catch critical issues you might miss and the cost of professional help is far less than the cost of overlooking something important.
• Focus your investigation on five key areas: financial records (including tax returns and cash flow), legal standing (contracts and litigation), daily operations (systems and key relationships), market position (competitive analysis), and regulatory compliance (licences and industry requirements).
• Take adequate time for thorough investigation, as due diligence typically requires 45-60 days for smaller transactions and much longer for complex deals, with rushing being the most common mistake buyers make.
• Use your findings strategically to either renegotiate the purchase price, request the seller fix identified problems before closing, or walk away from the deal, as research shows 85% of deals see price reductions during due diligence.

What is due diligence when buying a business?

Due diligence is the research and analysis you conduct before buying a business to verify it's what it claims to be. It helps you confirm the business has real commercial potential and aligns with your goals.

Think of it as your pre-purchase checklist. It gives you the confidence to proceed, renegotiate, or walk away. Whether you're buying an online business, a small business, or a larger company, don't skip this step.

Why is due diligence important?

Due diligence protects you from costly surprises after a deal closes. While the seller must accurately represent the business, verifying the details is your responsibility. Research shows 70–90% of M&A deals fail to create value. Inadequate due diligence is a top reason.

Your due diligence checklist should uncover potential risks so you make a sound decision, pay a fair price, and comply with regulations. Skipping this step could mean missing:

• Hidden liabilities: overstated earnings, unreported debts, or unexpected tax obligations
• Legal exposure: regulatory non-compliance that could result in fines or business closure
• Operational weaknesses: outdated systems, inefficient processes, or fragile supplier relationships
• Revenue risks: unreliable income sources or inflated customer numbers
• Reputation issues: market weaknesses or undisclosed brand damage

Get expert advice from a lawyer and financial advisor, especially for legal and financial matters.

Types of due diligence

Due diligence isn't a single task, but a collection of investigations. Understanding the different types helps you organise your research and focus on what matters most for the business you're considering.

• Financial due diligence: look at the business's financial health, including revenue, profit, cash flow, and debt
• Legal due diligence: examine contracts, intellectual property, and any past or pending lawsuits
• Operational due diligence: assess the day-to-day processes, systems, and staff that keep the business running
• Market due diligence: evaluate the business's position against competitors and its potential for growth
• Regulatory due diligence: confirm the business complies with all relevant industry rules and government regulations

Essential due diligence checklists before buying a business

The checklists below cover each area in detail.

Financial due diligence

Financial due diligence examines the business's financial health to verify revenue claims and uncover hidden liabilities.

• Review historical records: Review tax returns, financial statements, cash flow records, and profit and loss statements, focusing on the three most recent closed tax years as well as all open tax years.
• Verify tax compliance: Verify the business meets all tax obligations and has no outstanding liabilities
• Check for debts: Check for any outstanding loans, credit lines, or unpaid obligations
• Analyse cash flow: Analyse patterns to understand growth potential and financial stability
• Investigate revenue trends: Investigate performance against industry projections and benchmarks

Legal due diligence

Legal due diligence examines the company's legal standing, contracts, and any current or past litigation.

• Review all contracts: Review supply, customer, operational, and employee agreements, plus leases and licences
• Assess intellectual property: Assess patents, trademarks, copyrights, and trade secrets for value and risk
• Verify registrations: Verify business name, domain, and trademark registrations are current and properly held
• Investigate litigation: Investigate any past, pending, or threatened lawsuits or legal disputes, ensuring the scope includes investigations involving any officer, director, manager, or major shareholder.

Operational due diligence

Operational due diligence assesses the day-to-day systems, processes, and resources that keep the business running.

• Review strategy documents: Review business plans and long-term strategy
• Evaluate management structure: Evaluate staffing levels, roles, and human resources processes
• Assess key relationships: Assess customer and supplier contracts for stability and risk, as the business may be vulnerable if a single customer accounts for more than 20% of revenue.
• Inspect assets and equipment: Inspect age, condition, maintenance schedules, and repair needs
• Examine technology systems: Examine infrastructure, data security, and software to ensure they're current, secure, and scalable. When Marriott acquired Starwood, inadequate IT due diligence failed to detect a pre-existing data breach. This resulted in a $123 million fine.

Market position and competitive analysis

Market due diligence helps you understand a business's true value by examining its competitive position and growth potential.

• Review market strategy: Review plans and performance reports for sales channels and target markets
• Assess online presence: Assess search rankings, advertising campaigns, and digital marketing effectiveness
• Analyse competitors: Analyse market challenges, opportunities, and the business's competitive strength
• Evaluate customer acquisition: Evaluate how the business reaches and retains its customer base
• Check customer sentiment: Check records, feedback, and online reviews for satisfaction trends

Regulatory and compliance

Regulatory due diligence confirms the business meets all legal obligations and statutory requirements for its industry and location.

• Review industry regulations: Review compliance obligations specific to the sector
• Check licences and permits: Check all required licences, permits, and premises approvals are current
• Assess tax compliance: Assess tax records, liabilities, and adherence to local and international tax laws
• Review workplace compliance: Review adherence to employment conditions, agreements, and entitlements
• Investigate environmental obligations: Investigate liabilities related to waste management, pollution, or hazardous materials

Key documents to review during due diligence

Completing your due diligence checklist requires collecting and reviewing the business's financial records, contracts, legal documents, sales reports, and customer records.

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

Financial and tax

• Tax returns (several years where available)
• Profit and loss statements (several years where available)
• Balance sheets (several years where available)
• 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 due diligence

Due diligence follows a structured process that helps you investigate thoroughly and make an informed decision. Here's how to approach it step by step.

1. Assemble your due diligence team: Engage professionals early. You'll typically need an accountant to review financials, a lawyer to examine contracts and legal matters, and possibly a business broker or industry specialist. Their expertise helps you catch issues you might miss.
2. Request and organise documents: Ask the seller for all relevant records using your due diligence checklist. Create a system to track what you've received and what's still outstanding. Missing documents can be a red flag.
3. Conduct your investigation: Work through each due diligence category systematically. Review financial records, verify legal standing, assess operations, analyse market position, and confirm regulatory compliance. Take notes on anything that raises concerns.
4. Analyse your findings: Compare what you've discovered against the seller's claims. Look for discrepancies, hidden risks, or opportunities the seller may not have mentioned. Consider how any issues might affect the business's value.
5. Make your decision: Decide whether to proceed at the agreed price, renegotiate terms, or walk away based on your findings. This is a common outcome. Research shows 85% of deals see purchase price reductions during due diligence. Your due diligence gives you the evidence to support whichever path you choose.

Do your due diligence right

Proper business due diligence takes patience, care, and an expert eye. Here are some tips to get it right.

• Take your time: Due diligence typically takes weeks or months. Smaller transactions may take 45 to 60 days, while larger, more complex deals can take much longer. Rushing the process or glossing over details is the most common mistake buyers make.
• Get expert advice: Work with an accountant, lawyer, and broker. The cost of professional help is far less than the cost of missing something important. For a mid-market acquisition, legal due diligence typically costs $15,000 to $50,000.
• Use specialists for agreements: You'll typically need a lawyer to draft or review the purchase agreement, with accountants or financial advisers assisting on valuation, tax, financing, and deal structure. Find advisors in our advisor directory.
• Consider culture fit: Assess whether the business's existing culture aligns with your values, goals, and management style. Operational and cultural mismatches can create problems after the purchase.

Grow your new business with Xero

Once the business is yours, Xero helps you hit the ground running. Use Xero's small business tools to process transactions, manage cash flow, and spot opportunities for growth.

See how businesses of all types use Xero, or get one month free to try Xero accounting software for your new business.

FAQs on buying a business

Here are answers to common questions about due diligence when buying a business.

What are the advantages of buying a business?

Buying an existing business lets you skip much of the work needed to build from scratch.

• Inherit established assets: Gain an existing customer base, brand reputation, revenue streams, and supplier relationships
• Avoid startup costs: Skip the expenses of finding premises, hiring staff, and building inventory from nothing
• Build on a proven concept: Benefit from an established business model and potentially valuable intellectual property
• Access financing more easily: Lenders often view established businesses as lower risk than startups

What are the three pillars of due diligence?

The three pillars are financial, legal, and operational due diligence. Together, they help you verify a business's financial health, legal standing, and day-to-day viability.

How long does due diligence typically take?

Due diligence usually takes several weeks to a few months, depending on the business's size and complexity. Larger or more complex businesses require more time to investigate thoroughly.

Can I do due diligence myself or should I hire professionals?

You can review some areas yourself, but hiring professionals is strongly recommended. An accountant and lawyer will catch issues you might miss and help you avoid costly mistakes.

What should I do if I discover problems during due diligence?

You have three options: renegotiate the price to reflect the issues, request the seller fix problems before closing, or walk away from the deal. Your findings give you the information to make the best decision.