Due Diligence Checklist for Buying a Business
By the Connectyfy Deals Team · Updated · 5 min read
Key takeaways
- Due diligence verifies that the business you are buying is the one you were shown — profit, assets, liabilities and risks.
- Cover six areas: financial, tax, legal, commercial, people and operations.
- Trust the documents, not the pitch: match the books to bank statements and GST returns.
- Use what you find to adjust the price, add warranties and indemnities, or walk away.
What due diligence is (and when it happens)
Due diligence is the investigation a buyer carries out after agreeing headline terms — usually in a non-binding term sheet or letter of intent — and before signing the final purchase agreement. Its purpose is simple: confirm that what the seller has told you is true, and uncover anything they haven’t.
For a small business, due diligence typically takes a few weeks; for a larger company it can take a few months. Agree a timetable, an exclusivity period and a list of requested documents at the start.
1. Financial due diligence
- Three years of financial statements, plus current-year monthly management accounts.
- Bank statements for the same period — trace reported revenue to actual deposits.
- Quality of earnings: test every add-back the seller made; remove anything you can’t verify.
- Revenue by customer, product and month: look for concentration, seasonality and trends.
- Gross margin trend and the main cost drivers.
- Working capital: receivables ageing (are debts collectable?), stock (is it saleable?), payables (is anything overdue?).
- Debt, guarantees, and any charges registered over the assets.
Tip: If a seller claims significant profit ‘outside the books’, value the business only on what is recorded. Unrecorded income is also a tax liability that could follow the business.
2. Tax due diligence
- Income tax returns and assessments; any notices, demands or appeals.
- GST returns reconciled to the books and to GSTR-2B input credits.
- TDS compliance — deducted and deposited on time.
- Professional tax, customs (for importers/exporters) and other indirect taxes.
- Past tax exposures you could inherit, especially in a share purchase.
3. Legal due diligence
- Ownership: who legally owns the shares or the assets you are buying? Are there co-owners who must consent?
- Company records: MOA/AOA, share register, board minutes and ROC filings (for companies and LLPs).
- Leases: remaining term, renewal rights, lock-ins, and whether the landlord must consent to the transfer.
- Material contracts with customers and suppliers, including change-of-control or termination clauses.
- Licences and registrations — which transfer, and which must be re-applied for.
- Intellectual property: trademark registrations, domain names, software, recipes and designs owned by the business, not the founder personally.
- Litigation, consumer complaints, regulatory actions, and any disputes threatened in writing.
4. Commercial due diligence
- Why is the owner selling? Does the reason hold up?
- Market position: competitors, pricing power, online reviews and ratings.
- Customer retention and, where possible, a few customer conversations (with the seller’s agreement, late in the process).
- Supplier dependence: could a key supplier raise prices or walk away?
- Growth assumptions: are the seller’s forecasts realistic given the last three years?
5. People and HR due diligence
- Organisation chart, salaries and employment terms.
- Key people: who is critical, and are they staying? Consider retention bonuses.
- PF, ESIC and gratuity compliance and accrued liabilities.
- The owner’s role: how much does the business depend on them, and what handover will they give?
6. Operational due diligence
- Condition and ownership of equipment, vehicles and premises.
- Inventory count on or near completion.
- IT systems, software subscriptions, data and customer databases.
- Standard operating procedures, recipes, quality certifications.
- Insurance cover and claims history.
Red flags that should make you pause
| Red flag | Why it matters |
|---|---|
| Revenue in the books doesn’t match bank deposits or GST returns | Profit may be overstated, or there may be tax exposure |
| Seller is reluctant to share documents after an NDA | Something material may be hidden |
| One customer provides a large share of revenue | Losing them after the sale could wipe out the profit |
| Lease expires soon or the landlord won’t consent | A location business may lose its main asset |
| Key staff or the owner won’t commit to a handover | Relationships and know-how may leave with them |
| Unresolved tax notices or litigation | Liabilities may transfer to you, especially in a share deal |
Turning findings into protection
Due diligence rarely ends with a clean bill of health, and it doesn’t need to. Use what you find to:
- Adjust the price for verified profit or newly discovered liabilities.
- Restructure the deal — for example, buying assets instead of shares to leave historical liabilities with the seller (see share sale vs asset sale).
- Add contractual protection: warranties, specific indemnities, and part of the price held in escrow or paid later.
- Agree conditions that must be met before completion (landlord consent, licence transfers, clearing tax dues).
- Walk away if the risks outweigh the opportunity.
Always involve a chartered accountant and a lawyer for anything beyond a very small purchase. On Connectyfy, you request documents from the seller in the private Deal Room. Read how buying works or browse businesses for sale.
Frequently asked questions
How long does due diligence take when buying a small business?
For a small, well-prepared business it typically takes a few weeks. Larger companies, or sellers with incomplete records, can take several months.
Who pays for due diligence?
The buyer usually pays for their own accountants and lawyers. The seller pays for preparing documents and their own advisors.
Should I do due diligence before or after signing a letter of intent?
Detailed due diligence normally starts after a non-binding letter of intent or term sheet, which sets the headline price, structure, exclusivity period and timetable.
What is the biggest due diligence red flag?
Financial records that don’t reconcile with bank statements and GST returns. If the reported profit cannot be verified, neither can the price.