Buying a business: your essential due diligence checklist

What is due diligence when buying a business?

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

‘Due diligence’ is an investigation to build trust and confidence. In the context of buying a business, it’s your practical research and analysis to make sure the business you’re acquiring is what it claims to be, has measurable commercial potential, and aligns with your goals. Think of it as your pre-purchase checklist that gives you confidence to proceed, to renegotiate, or to walk away.

Why is due diligence important?

When acquiring a business, due diligence is your responsibility. While the seller must accurately represent the business, it’s up to you to verify the details!

Your due diligence checklist should aim to uncover potential risks, so you’re sure you're making a sound decision, paying a fair price, and complying with regulations. Neglecting due diligence could cause you major headaches once the deal is signed. You risk missing:

• Hidden liabilities or overstated earnings
• Unreported debts, tax implications, or unreliable revenue sources
• Legal issues or regulatory non-compliance, which might result in fines or even business closure
• Operational inefficiencies, outdated systems, or fragile supplier or customer relationships
• Hidden reputational issues or market weaknesses

It’s worth seeking expert advice with your due diligence checklist, especially for legal and financial matters.

Essential due diligence checklists before buying a business

Our due diligence checklists cover the areas you need to investigate to be confident in your purchase. Get professional advice from a lawyer and your financial advisor for more details.

Financial due diligence

The financial due diligence checklist covers the business’s financial health.

• Review 3 to 5 years of the business’s tax returns and financial statements, cash flow records and sales figures, profit and loss statements, and assets.
• 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

The legal due diligence 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 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

The operational due diligence checklist covers all aspects of business continuity.

• 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

This due diligence category helps you understand a business’s true value so you don’t pay too much for it. It deals with how, to whom, and where the business sells its products or services, the business’s position compared with competitors, and its opportunities 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 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

Laws and regulations vary by industry, country, and region. Regulatory and compliance due diligence examines regulatory challenges facing the business, and that it meets its obligations and statutory requirements.

• 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 its potential liabilities in areas like waste management, pollution, and hazardous materials.

Key documents to review during due diligence

To complete your due diligence checklist properly, you’ll need to collect and review all the business’s financial records, contracts, legal documentation, sales reports, and customer records.

Documents you need might vary from our list here, depending on your industry and location. It’s smart to get help from an accountant, lawyer, and/or broker to make sure you’ve covered everything.

Financial and tax

• Tax returns (3–5 years)
• Profit and loss statements (3–5 years)
• Balance sheets (3–5 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

Do your due diligence right

Proper business due diligence takes patience, care, and an expert eye.

• Take your time. Proper due diligence takes weeks or months, depending on your resources and the size and complexity of the business you’re buying. The most common mistake in due diligence when buying a business is to rush the process, or not understand details, before making decisions.
• Get expert advice from your accountant, lawyer, and broker. It’s a false economy to save money or time by doing it alone. The costs of missing something important would easily outweigh the initial cost of accountants and lawyers who will catch what you might miss.
• 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.
• Make sure you think about the operational and cultural aspects when doing your due diligence. Ideally, the existing culture of the business aligns with your own values, goals, and management style.

FAQs on buying a business

How do I buy a business in the USA?

Here’s some general information about buying a business so you know what you’re getting into. But make sure you get professional advice from your accountant, financial advisor, or lawyer before leaping in.

If you’re buying a business in the USA, you should have documentation including a letter of intent, confidentiality agreement, contracts and leases, financial statements and tax returns, a sales agreement, and purchase price adjustment. You’ll also need to investigate the tax rules in the state or region you’ll be doing business in, and compliance requirements such as licenses and permits, zoning requirements, and environmental and other regulations.

• US government guidance on buying an existing business in the USA

What are the advantages of buying a business?

By buying an existing business, you’re dodging much of the work to build a business from scratch.

• You inherit an established customer base and brand reputation, and existing revenue streams, supplier relationships, and operational systems.
• You won’t have to deal with high initial operating costs, finding a business home, employees, or stock.
• You’ve also got a proven concept, possibly intellectual property of high value, and brand recognition to build on.
• You may have easier access to financing with an established business.

Grow your new business with Xero

The business is yours… now to make it grow! Xero has the small business tools to rapidly process your transactions, manage your cash flow, and find opportunities for growth. Here’s how businesses of all types use Xero.

Xero accounting software for your small business.