Diligence Checklist
0 of 35 complete
Financial
0/7Legal
0/8Operations
0/6Commercial
0/5Insurance & Risk
0/4Closing Preparation
0/5The Diligence Request List
Financial
- Financial statements (P&L, balance sheet) for the last three full years and year-to-date, monthly where available
- Business tax returns for the last three years
- Detail and documentation for every add-back or adjustment claimed
- Revenue by customer for the last three years
- Accounts receivable and payable aging as of the most recent month-end
- Bank statements for the trailing twelve months
- Schedule of all debt, leases, and recurring obligations
Legal & Licenses
- Organizational documents and ownership records
- All material customer and supplier contracts
- Premises lease and any equipment leases
- All licenses, permits, and registrations, with holders identified
- Any current, pending, or threatened litigation or disputes
- Trademarks, trade names, domains, and IP registrations
Operations & People
- Employee roster with roles, tenure, compensation, and any agreements
- Payroll records and a list of any 1099 contractors with their scope
- Org chart and a written description of the owner's weekly role
- List of software systems and who administers each
- Top-ten supplier list with terms
- Equipment and vehicle list with age and maintenance records
- Documented processes, manuals, or SOPs that exist
Commercial
- Customer contracts or recurring-service agreements in force
- Pipeline, backlog, or booking reports as maintained
- Pricing lists or rate cards, current and prior
- Marketing spend by channel for the trailing twelve months
Insurance & Risk
- All insurance policies in force with claims history (five years)
- Workers-compensation experience rating documentation where applicable
- Safety, inspection, or regulatory correspondence for the last three years
Scope the QoE
Quality of earnings is the workstream you outsource, and comparable quotes start with a comparable brief. Build the one every provider can price the same way.
QUALITY OF EARNINGS - SCOPE REQUEST Target: small business under evaluation. Size: roughly $2,000,000 revenue, $500,000 reported SDE. Stage: under signed LOI. Records: 3 years of financials available. Clean: accrual books that tie to the tax returns. Timeline: report needed within 4 weeks. Please quote scope, price, and turnaround for an engagement matching the above, and note what you would exclude at that price.
When the Number Comes Back Different
The Multiple You Agreed
3.00x
Price over the SDE the seller showed
Same Multiple, Verified SDE
$1,290,000
The defensible new price
If You Hold the Price
3.49x
The multiple you would actually pay
The LOI's own multiple prices the verified earnings at $1,290,000. Holding $1,500,000 means paying 3.49x for a business both sides priced at 3.00x.
When a Finding Surfaces
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| 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. |
Franchise Resale: Reading the FDD
A franchise resale buyer signs the current agreement, not the seller's, so a resale carries a diligence layer the six workstreams above do not: the Franchise Disclosure Document. Read it for what a transfer changes for you.
The Money You Will Owe the Franchisor
- Ongoing royalty and brand-fund percentages (Items 6 and 11), applied to your projected revenue, not the seller's
- The transfer fee this purchase itself triggers (Item 17), and who customarily pays it
- Required technology, software, and supply purchases priced through the franchisor (Items 8 and 11)
- Any required remodel or refresh a transfer triggers, with its real cost and deadline
Territory and Competition
- Whether the territory is exclusive, protected, or neither (Item 12), in the contract's words
- The franchisor's right to sell online or through other channels inside your territory
- How many units the system added and closed nearby (Item 20's tables, three years back)
The System's Health
- Litigation history (Item 3): patterns of franchisee suits matter more than any single case
- Franchisor financials (Item 21): a thin balance sheet behind a royalty stream is your risk
- Turnover in Item 20: transfers, terminations, and non-renewals against the unit count
- Calls to three current and two former franchisees, which the FDD's contact lists exist for
What a Transfer Changes for You
- Whether you sign the CURRENT franchise agreement, not the seller's older, often better one
- Remaining term and renewal conditions (Item 17), and what renewal will cost
- The franchisor's approval process and timeline for this transfer, in writing
- Personal guarantee and non-compete obligations the agreement imposes on you
Earnings Claims, Read Correctly
- Item 19's basis: whose units, which years, gross or net, and whether the seller's unit is typical of it
- The seller's own books against Item 19, explained if they diverge either way
The franchise-resale guide covers the whole deal, and a franchise attorney should read the agreement before you sign. Not legal advice.