Diligence Checklist
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Financial
- Quality of earnings engaged or consciously waived, with the reason written down
- P&L reconciled to filed tax returns for three years, differences explained
- Every add-back verified against documents, not the seller's schedule
- Revenue by customer for three years; concentration above 15% understood and priced
- AR and AP aging reviewed; collectability of what conveys assessed
- Working capital baseline set and the peg negotiated into the purchase agreement
- All debt, leases, and off-balance-sheet obligations listed with payoff status at close
- Deferred revenue quantified: prepaid memberships, service contracts, retainers and packages are cash the seller banked for work you will deliver
Legal
- Lien and UCC search run on the entity and assets
- Material contracts read for assignment and change-of-control clauses
- Lease reviewed: term, options, assignment consent, personal guarantees
- Litigation, disputes, and regulatory actions searched and disclosed
- Names, marks, domains, and any IP confirmed owned and transferring
- Every license and permit mapped: holder, transferability, timeline (see the License Rules table)
- Worker classification confirmed: employees paid as 1099 contractors are an inherited tax and workers-comp liability
- State tax clearance certificates requested; unpaid sales and payroll tax balances follow the business in an asset deal
- Every third-party consent the change of control needs listed with a name against it and a date, since a consent nobody asked for surfaces in closing week
- Asset versus stock structure settled with tax advice on both sides
Operations
- Org chart with tenure, pay against market, and flight risk for key people
- Everything the owner personally does listed, with a named replacement plan
- Software, data, and account access inventoried and transferable
- Supplier concentration and terms reviewed; single-source risks named
- Equipment and fleet condition assessed with a real capex forecast
- Documented processes exist, or their absence is priced into the transition
Commercial
- Local market and competitive position sanity-checked beyond the CIM's story
- Review profile and reputation trajectory across platforms examined
- Pipeline, backlog, or recurring base verified against source records
- Pricing versus market checked; underpriced legacy relationships identified
- Customer retention or churn computed from data, not asserted
Insurance & Risk
- Insurance claims history pulled; policies reviewed for post-close continuity
- Claims-made policies identified; who buys the tail, for how many years, at whose cost settled in the purchase agreement
- Safety record and workers-compensation experience examined where relevant
- Industry-specific compliance verified (the industry guide's diligence section)
- Environmental exposure assessed; Phase I ordered where the asset class warrants it
Closing Preparation
- Purchase agreement schedules complete and consistent with diligence findings
- Non-compete and transition-services terms agreed in substance
- The seller's role after closing written to match what the lender permits, because an SBA-financed change of ownership bars the seller from staying on as an employee and allows only a bounded consulting period
- Financing contingencies, appraisal, and lender conditions tracked to clearance
- Funds flow agreed before closing week: prorations, inventory count, and every lien's payoff letter and release inside it
- Day-one plan written: payroll, banking, insurance, licenses, and the announcement
When a Finding Surfaces
13 of 13
| Add-backs that do not survive scrutiny | Price | Reprice at the multiple the LOI already agreed, applied to the verified SDE. | The seller defends numbers the documents contradict; that tells you about everything else. |
| Cash sales nobody can verify | Price | Pay for provable earnings only. Unreported cash is not an asset; it is a liability with the seller's name on it. | The provable number breaks the deal and the seller will not move. |
| Environmental exposure on the property | Escrow | A Phase II before close, and remediation escrowed from the seller's proceeds if it finds anything bounded. | The finding is open-ended; unbounded remediation has no price. |
| Equipment ran without reinvestment | Price | Get the catch-up capex quoted, then take it off the price or escrow it against the first year's failures. | The catch-up bill rivals the down payment. |
| Family on payroll below market | Price | Restate SDE with market-rate labor for every role that actually has to be filled, then reprice on the restated number. | Half the roster is family who leave at close and the labor market cannot replace them. |
| Lease is short or the landlord balks | Structure | Close conditional on assignment plus enough term and options to outlive the loan. | The location is the business and there is no path to term. |
| License does not transfer to you | Structure | Make reissuance a closing condition, with the seller's qualifier staying on during a transition period. | The license is personal to the seller and you cannot qualify within the transition window. |
| One customer is a quarter of revenue | Structure | Tie part of the price to retention: an earnout or a forgivable seller note that survives only if the account does. | The relationship is personal to the seller and does not transfer. |
| One employee holds the licenses or relationships | Structure | A retention bonus funded at close and paid over time, agreed with that person before you sign. | That person is leaving and the license or book leaves with them. |
| Pending litigation | Escrow | An indemnity holdback sized to the exposure, with the seller's counsel on record about the range. | The exposure is existential, uninsured, or nobody can size it. |
| Seller resists a non-compete | Walk | There is no structure for this one. A seller who plans to stay out of the business signs without a fight. | Immediately; the resistance is the information. |
| Tax returns do not match the P&L | Price | The returns are the number that counts. Price on the returns unless the gap has a documented, boring explanation. | The gap is large and the explanation keeps changing. |
| The lender's valuation comes in below the price | Price | The bank lends against its number, so the gap is yours to close: reprice to the valuation, fill it with more equity, or push it into a seller note on standby. Ask which of the three the lender will accept before choosing. | The seller treats the valuation as an insult rather than information, and the gap is the whole down payment. |