You've decided to sell. Now a buyer is digging into every corner of your business. They're checking your contracts, interviewing your team, reviewing your books. If you're not ready, problems emerge. Sales collapse. Deals die. Here's how to prepare.
Three years ago I watched a deal die in week six of due diligence. The seller had been waiting nine months to sell his family's HVAC company. He'd finally found a buyer who was serious. Letter of intent signed. Deposit down. Everything on track.
Then the buyer's forensic accountant found a problem. The seller had been routing $180,000 per year in personal expenses through the business for the last five years. Unreported. Undocumented. When the buyer asked about it, the seller panicked. His story kept changing. Instead of a simple conversation about add-backs, it became proof of either incompetence or dishonesty. The buyer walked. The deal died. The seller's reputation took damage.
Due diligence is the period where all of that gets investigated. Typically 30 to 90 days. The buyer's accountants, lawyers, and advisors will examine your financial records, contracts, operations, and liabilities. Their job is simple: verify that everything you claim is true, and find anything you missed, forgot, or failed to disclose.
Think of it as a stress test for your narrative. If your story holds up, the deal moves forward. If cracks appear, the buyer renegotiates the price, demands holdbacks, or walks away entirely.
Being prepared means three things: transparency, organization, and speed. Have your records ready before the buyer asks. Answer questions quickly. Disclose problems proactively. The seller who can say, "Yes, we knew about that, here's the explanation and here's how we've managed it," moves a deal forward. The seller who says "Uh, I'm not sure" or "Let me find that document" creates doubt and gives the buyer leverage to renegotiate.
The difference between a deal that closes and a deal that dies often comes down to a single thing: how prepared the seller was when the buyer's team started asking questions.
The buyer's accountants will spend 30 to 40% of their time on financials. They need proof that the numbers you've claimed are real, sustainable, and defensible. Here's what they'll ask for.
Revenue trends. Is the business growing, flat, or declining? The buyer wants to see at least stable revenue over three years, ideally growth. If revenue is declining, expect questions and a lower valuation multiple.
Consistency between tax returns and P&Ls. Your tax return and P&L should match. If they don't, the buyer's accountant will ask why. Timing differences are fine. Material differences create doubt.
Cash flow reality. The buyer will map reported profits to actual cash movement in your bank statements. If you claim $500K in EBITDA but your bank account shows $150K in average monthly cash, there's a problem. The buyer will dig into why.
Customer concentration risk. If 50% of revenue comes from a single customer, the buyer will reduce the valuation multiple or demand a customer retention agreement. If that customer can leave at will, the valuation can drop by 30-50%.
Recurring revenue percentage. Businesses with 70%+ recurring revenue command higher multiples than project-based businesses. Be ready to document which revenue is recurring, and for how many years the customers are under contract.
Watch for these. They will cost you money in due diligence.
Fix these before the buyer arrives. If you can't, disclose them and explain them proactively.
The buyer wants to know if this business can run without you. They'll interview your team, review your systems, and assess the risk of revenue loss after the sale.
The buyer will be anxious. If your top salesman or your operations manager leaves after the close, the deal value disappears. The buyer will want written agreements from key employees to stay for at least 12 months post-close. If key people won't commit, the valuation drops.
Start conversations with your team early. Tell them you're exploring a sale. Be honest about what will change and what won't. Key employees should understand their role in the new ownership structure. Get their written commitment to stay.
Every major customer contract should be reviewed. Are they with you, or with the owner? Can they cancel on 30 days notice or 180 days? Is there a personal relationship that dies with the owner?
The buyer will want signed amendments to all major customer contracts stating that the service agreements survive the sale and transfer to the new owner. If customers don't agree, your deal value drops accordingly.
Buyers want documentation of how you actually run the business. Operations manuals. Standard operating procedures. Customer onboarding checklists. Inventory management processes. The more systematized and documented your business is, the higher the valuation multiple and the faster the close.
If everything depends on you knowing which customer prefers which process, or where to find the inventory list, or how to handle refunds, you have an owner-dependent business. These trade at 2.0x to 3.5x EBITDA. Systematized businesses trade at 4.0x to 6.0x EBITDA.
The buyer's lawyers will dig into the legal structure, ownership, contracts, and compliance of your business. They want to ensure you own what you say you own, and that there are no hidden liabilities.
Disclose all pending or threatened litigation immediately. Customer lawsuits. Employee claims. Vendor disputes. Patent challenges. Regulatory investigations. The buyer will find them anyway through court searches. If they find something you didn't disclose, you lose credibility and they'll demand a price cut or escrow holdback.
Settlement agreements should be available if litigation has been resolved. If litigation is pending, work with your lawyer to understand the exposure, and disclose it upfront with professional opinions on likelihood and potential cost.
If you're in a regulated industry, the buyer will confirm that your licenses are current, that you're compliant with industry standards, and that there are no pending violations. Have your compliance officer or lawyer prepare a summary of your compliance posture. Address any minor violations before the buyer arrives.
For industries like construction, environmental, food service, or healthcare, this is critical. A pending OSHA violation or EPA notice can tank a deal.
If your business has intellectual property, get it documented. Trademarks. Patents. Copyrights. Software code ownership. Customer lists. Proprietary processes. The buyer needs assurance that you own it, that it's not being infringed, and that it will transfer cleanly to them.
If intellectual property is tied to you personally (your name in a trademark, or custom software you developed), work with the buyer's lawyers to create documentation showing it's part of the business asset.
The best time to prepare for due diligence is six to twelve months before you actually list for sale. Here's what to do.
Build a physical or virtual data room where all documents live. Use a secure platform like Box, Dropbox, or a specialized deal management tool. Organize documents by category: Financial, Legal, Operational, HR, Contracts, Compliance. Within each category, organize by type and date.
The buyer's team will access this room 50+ times during due diligence. If documents are missing or disorganized, it slows everything down. If documents are clearly organized, the buyer's team moves faster and finds fewer problems.
Pull 3 years of tax returns, P&Ls, and bank statements. Have your accountant prepare a financial summary showing normalized EBITDA, add-backs, and year-over-year comparisons. Have them write a brief memo explaining any unusual items, changes in accounting methods, or one-time events.
If your financial records are a mess, hire a bookkeeper to spend 2-3 months getting them clean. Reconcile all accounts. Create consistent P&L statements for each year. Document add-backs with supporting receipts or explanations. This upfront investment will pay for itself in a faster close and higher valuation.
Have a lawyer conduct a legal audit. Search for liens. Check for litigation. Review contracts. Confirm licenses. Resolve anything that can be resolved: pay off old liens, settle pending disputes, renew expiring licenses. For issues that can't be resolved, document them clearly so the buyer can assess the risk.
Create template contracts for your major customer and vendor relationships. Have customers sign amendments stating that their agreements survive the sale. If large customers are resistant, understand their concerns and address them. Loss of a major customer during diligence will cost you significant valuation dollars.
Create an operations manual. Walk through your standard processes: How do you onboard customers? Handle complaints? Manage inventory? Conduct quality checks? Pay vendors? Schedule employees? This documentation shows the buyer that your business is systematized and can survive without you.
Meet with your management team. Tell them about the potential sale. Be transparent about what due diligence involves. Prepare them for interviews with the buyer's team. Ensure key employees are willing to sign retention agreements. Start building the narrative that your team is strong and the business can thrive with new ownership.
Work with your lawyer to prepare a detailed disclosure document. This document lists everything the seller is representing as true about the business, and includes schedules for known issues, litigation, pending contracts, etc. Being comprehensive and transparent in your disclosures protects you legally and speeds up the close.
Six months of preparation can save you six months of due diligence. A buyer will close faster and pay more for a business that's organized and transparent from day one.
Due diligence is the investigative process a buyer conducts before purchasing your business. During a typical 30-90 day period, the buyer's accountants, lawyers, and advisors will examine your financial records, contracts, legal documents, operations, and liabilities. The goal is to verify that everything you've claimed about the business is accurate and to identify any risks or hidden problems that might affect the price or closing.
Due diligence typically takes 30-90 days, depending on the size and complexity of your business. Smaller businesses with straightforward financials may close in 4-6 weeks. Larger deals, businesses with multiple locations, complex contracts, or unresolved liabilities can stretch to 120+ days. Having organized records and clean documentation before the buyer arrives will significantly speed up the process and increase the chance of a clean close.
If the buyer finds issues during due diligence, the buyer will likely ask for a price reduction, additional escrow holdback, or repairs before closing. The best defense is to find and fix problems yourself before the buyer arrives. Transparency builds trust and allows you to frame issues on your terms, rather than having the buyer discover them and threaten to walk away.
At minimum, have ready: 3 years of tax returns, P&L statements, bank statements, accounts receivable and payable aging, debt/loan schedules, employee contracts and payroll records, all customer contracts, vendor agreements, equipment leases, insurance policies, business licenses, permits, incorporation documents, bylaws, shareholder agreements, litigation history, environmental reports (if applicable), and any regulatory compliance records. Organize these in a data room so the buyer's team can access them quickly and efficiently.
No. Attempting to hide problems is illegal and will destroy your credibility if discovered. Buyers investigate thoroughly with forensic accountants, employee interviews, and court record checks. If they find hidden liabilities, they will either walk away or demand massive price reductions. Disclosure of known issues upfront, with explanations of how they've been managed, is far better than having the buyer uncover them during investigation. Transparency is your best strategy.
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