Due Diligence Progress
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Most first-time buyers focus on the wrong things. They get excited about revenue numbers and miss the red flags hiding in the details.
This checklist covers what experienced buyers look for before making an offer. Use it to protect yourself and negotiate from a position of strength.
1Financial Red Flags
Before you get emotionally invested, verify these first:
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Tax returns match the financials
Request 3 years of tax returns and compare them to the P&L. Discrepancies = problem.
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Revenue isn't dependent on one customer
If more than 30% of revenue comes from a single client, that's concentration risk. What happens if they leave?
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Seller's Discretionary Earnings (SDE) is real
SDE = net profit + owner salary + add-backs. Make sure the add-backs are legitimate, not inflated.
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Accounts receivable are collectible
Ask for an aging report. If customers owe money for 90+ days, that "revenue" may never arrive.
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There are no hidden liabilities
Ask directly: pending lawsuits, tax liens, equipment leases, deferred maintenance, employee disputes.
2Questions to Ask Every Seller
These reveal what the numbers don't:
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"Why are you selling?"
Listen carefully. Health, retirement, new opportunity = fine. Burnout, competition, declining market = dig deeper.
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"What would you do differently?"
Sellers often reveal problems disguised as advice.
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"How much time do you actually spend?"
Compare their answer to what's realistic. "10 hours a week" usually means 40.
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"What happens if you leave?"
Key relationships, vendor terms, and customer loyalty may walk out the door with them.
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"Would you stay on for 90 days?"
Transition support matters. If they refuse, ask why.
3Documents to Request Before Signing
Get these before you make an offer:
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3 years of tax returns
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Bank statements (12 months)
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A/R and A/P aging reports
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Equipment and assets list
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Employee roster
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Lease agreements
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Customer list (with revenue)
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Vendor contracts
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Pending legal matters
4The Typical Deal Timeline
Know what to expect:
| Phase |
Timeframe |
| Initial interest + NDA |
Day 1 |
| Review financials |
Week 1-2 |
| Ask questions + site visit |
Week 2-3 |
| Letter of Intent (LOI) |
Week 3-4 |
| Due diligence period |
Week 4-8 |
| Financing + legal |
Week 6-10 |
| Closing |
Week 10-12 |
Expect 60-90 days from serious interest to keys in hand. Rushing leads to mistakes.
Use this checklist on every deal you evaluate. The best buyers protect themselves by asking the hard questions early.
HedgeStone Business Advisors | hedgestone.com | (561) 593-3711