How to Conduct Due Diligence When Buying a Business

When buying a business, it is your responsibility to make sure the company's affairs are in order before you finalize the purchase. This legal due diligence normally occurs in the 60 to 90 days prior to buying a business. You conduct due diligence once you and the seller have signed a letter of intent, sometimes called a term sheet. The seller then agrees to give you access to all business data, including finances, sales figures, personnel records and customer data.


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    Hire professionals skilled in analyzing businesses to help you with the due diligence process.
    • An attorney who specializes in mergers and acquisitions should be familiar with the process of buying a business. You can often find these lawyers listed as M&A attorneys.
    • A forensic accountant has the auditing and investigative skills to dig deep into the company's financial records and uncover any irregularities. Look for a specialist in acquisition due diligence when you buy a business.
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    Gather documents about the company's business structure and practices.
    • The company's organizational documents should include articles of incorporation, bylaws, names of board members, board meeting minutes, names of shareholders, a list of all the states and countries where the company does business and an organization chart.
    • Your forensic accountant needs the annual reports, tax filings, a profit and loss statement, the general ledger, accounts payable and receivable and reports of assets and liabilities in order to complete the due diligence process.
    • Include mortgages, deeds, leases and other assets or liabilities that may affect your decision to buy a business.
    • Request copies of all licenses, permits and letters of consent.
    • As part of your due diligence, read articles and press releases about the company.
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    Inventory all physical assets prior to buying a business.
    • You want to know the value of all assets so you can determine the appropriate price to pay for the company.
    • Physical assets include real estate, manufacturing equipment, office equipment and supplies, inventory on the shelf and raw materials.
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    Review all contracts with suppliers and subcontractors. When you buy a business, you may have to fulfill contractual agreements signed before you purchased the business.
    • You and your attorney should look at installment agreements, labor contracts and purchase contracts.
    • Ask the seller to provide a list of attorneys, accountants, consultants and other professionals who have worked with the business over the past 3 to 5 years.
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    Scrutinize personnel records, including full- and part-time employees, subcontractors and board members.
    • Evaluate the employee handbook or term of employment before buying a business.
    • Give the accountant a list of current salaries, benefits and bonuses for the last 3 to 5 years.
    • Secure resumes for top-level employees and board members.
    • The M&A attorney needs to know about any labor disputes or worker's compensation claims.
    • Due diligence includes an investigation of personnel problems, such as terminations, harassment charges or wrongful termination lawsuits.
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    Acquire the legal documents and history for any pending or threatened litigation.
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    Examine all insurance policies and insurance claims as part of the due diligence process.
    • Make sure you understand current coverage and claims before you buy a business.
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    Study existing products and services and those that are under development.
    • When you consider buying a business, you want to see all testing data, warranty claims, complaints, regulatory compliance letters, engineering reports, customer feedback and surveys.
    • Inspect all patents, copyrights, work-for-hire agreements, trade secrets and the company's policy for protecting intellectual property rights.
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    Check out the customer data provided by the seller, including market research, advertising campaigns, sales policies, return policies, credit policies and service agreements before you buy a business.


  • Depending on the type of business, you may want a list of the company's largest customers.
  • The due diligence process should include determining the deprecated value of any goods or products, especially if products have shelf lives.
  • Generally, due diligence covers the last 3 to 5 business years.


  • Failing to do due diligence may result in financial ruin.
  • Don't forget to request information about environmental studies, hazardous materials and environmental licenses or permits.

Things You'll Need

  • Organizational documents
  • Financial records
  • Mortgages, deeds and leases
  • Licenses, permits and letters of consent
  • Articles and press releases
  • List of physical assets
  • Copies of contracts and other agreements
  • List of professional service providers
  • Personnel records
  • Employee contracts
  • Employee handbook
  • Schedule of employee benefits and salaries
  • Resumes
  • Copies of litigation
  • Insurance policies and claims
  • Testing data
  • Warranty claims or complaints
  • Regulatory compliance letters
  • Engineering reports
  • Customer feedback and surveys
  • Patents, copyrights or work-for-hire agreements
  • Customer data
  • Market research and advertising campaigns
  • Sales policies, return policies, credit policies and service agreements

Article Info

Categories: Buying & Forming a Business