The due diligence phase is arguably the most important part of any business purchase.
It’s where you take a deep dive into the business you’re thinking of buying – its financials, its systems, its history, and much more. It’s easy to get swept up dreaming about a new life as a business owner, but you need to balance fantasy with reality. It doesn’t matter how appealing something might look – if the numbers don’t stack up, you should always walk away.
So how do you conduct due diligence? In this article, we’re going to strip out all the waffle and give you a simple and condensed twelve-step checklist which you can follow for almost any business transaction. It’ll cover the essential steps, to help you make your next entrepreneurial move with confidence - and then dive into each step in more detail.
Let’s get started.
Due Diligence Checklist for Buying a Business - 2026
First of all, here’s the 12-step checklist at a glance. We recommend copy/pasting it into a Word document and ticking it off as you go. That’ll help you stay organised, but it’ll also let you see the tangible progress you’re making as you work through the (sometimes quite long) due diligence process.
If this looks intimidating, don’t worry - not everything here will be relevant for every transaction, but it’s good to be aware of them.
- Set-Up: DD timeline, document request list, adviser roles, confidentiality protocol
- Financial Due Diligence: 3 years financials, revenue verification, margin analysis, AR aging, AP reconciliation, debt/LOC, working capital needs, deferred revenue/gift vouchers, contingent liabilities
- Inventory: full stock report, “good & resalable” test, valuation vs balance sheet
- Assets & Equipment: asset register, condition, service contracts
- Sales: sales process walkthrough, top customers (80/20), pricing/discount structure, repeat vs one-off revenue, pipeline visibility, CRM systems
- Marketing: marketing plan, ROI, positioning/USP clarity, website + digital assets
- People/HR: org chart, key person risk, employment contracts, compensation/benefits, PAYE & National Insurance, TUPE/transfer obligations, disputes
- Systems & Operations: accounting software, operational workflows, monthly reporting capability, IT contracts, website/domains access, banking controls
- Customers, Suppliers and Competition: competitor analysis, supplier relationships, customer concentration
- Contracts & Legal: lease assignment clause, renewal terms, change-of-control provisions, supplier/customer contracts, licences, litigation/compliance
- Pro Forma: post-acquisition debt, owner salary, conservative revenue scenario (-10–25%), seasonality, capex provision, break-even analysis
- Decision & Renegotiation: deal-breakers, price adjustments, escrow/earn-out terms, risk mitigation conditions, post-close action plan
Step One: Set-up
Before the due diligence process begins in earnest, you need to lay the foundations. Have conversations with the seller about how long you expect it to last. Twenty business days is typical for smaller deals, but more complex acquisitions might take longer. Set deadlines for the delivery of key documents.
Don’t go it alone, if possible. Assemble a team that can help you speed up the due diligence process. That will often include an accountant to look over the financial information, and a lawyer to check the contracts. You might also want to recruit a friend or business partner to help with the ‘grunt work’ such as inventory counts.
Tip: Our article How to Find the Right Accountant or Lawyer When Buying a Business can provide some more advice on this front.
One other important thing to set in stone at the beginning is confidentiality. Make sure you know who you’re able to speak to and what you can see – and if a seller puts too many restrictions in place, ask why and be ready to walk away early.
Step Two: Financial Due Diligence
Your goal here is simple: prove the financials you valued the business on are real.
For that to happen you need a minimum three years of financial information, including statutory accounts, corporation tax returns and management accounts. Once you’ve got that, you’ll need to know how to verify business revenue and expenses through sampling and tracing. Sampling just means taking a representative spread of invoices from across different months and years (since you don’t have time to audit their entire business). Tracing means following the money from invoice > payment > bank.
You’re looking for any hidden expenses, aggressive accounting, or suspicious-looking one-off payments that are used to demonstrate ‘growth’. Mostly what you’re looking for is consistency, and no wild fluctuations in Cost of Goods Sold (COGS), gross profit or expenses.
Your financial due diligence checklist should incorporate:
- Customer concentration – This is a big one. Check that your target business isn’t getting 90% of its money from one client. If they leave, you’re in trouble.
- Owner add-backs and benefits – You want to make sure these are real.
- Accounts receivable (AR) – This is all the money that’s been invoiced, but not received. Check the average collection time, and any disputes or trends here.
- Accounts payable (AP) – Similarly to above but for outgoing payments – check they line up with supplier statements.
- Debt, loans and credit – Explore in detail any debt and loans the business has to lenders. Check rates, covenants that surround the loans, and how/when they are paid.
Tip: Our article Financial Due Diligence: What Every Business Buyer Needs to Know delves into this part of the process in more detail.
Step Three: Inventory Due Diligence
You don’t want to pay for dead stock disguised as ‘assets’. Get hold of an inventory report, and define ‘good and resalable’ stock. Flag anything that’s obsolete, slow moving or high value. Make sure you do an independent count here, and don’t let the seller help too much. It’s important that you see with your own two eyes that the counted inventory is close to the balance sheet. If not, it’s time to renegotiate.
Step Four: Assets & Equipment
This one might not be as important if you’re buying a service business, or something digital – but if your target business relies heavily on equipment, you need to check it works. That could be anything from company cars to laundry machines to manufacturing equipment.
An equipment valuation for small businesses should list everything, including whether its owned or leased, and whether it’s in working condition. If it’s essential equipment, run through maintenance history and warranties to avoid any nasty surprises. Estimate the remaining useful life, and make sure you’re aware of the replacement costs in the event that something breaks down. If that happens during your first few weeks as a business owner, you could find yourself short on working capital quickly.
Step Five: Sales Due Diligence
This is another important step. Your due diligence process should investigate the sales engine in its entirety – not just recent results. How are leads generated? Are they referrals, repeat customers, or one-time buyers? How do your salespeople nurture those leads, and what CRM tools do they use to make sure nothing falls between the cracks?
You should identify the top sales performers, and make sure you’re aware of how dependent the business is on them. If they decide to leave weeks after you’ve set yourself up as the new owner, you could find yourself scrambling. You should also review pricing and discounting rules, to see how standardised these are or whether the sales team is making them up on the fly.
Depending on your previous experience, this might be the part of the due diligence process where you identify some of the biggest opportunities for growth. Unexplored territories, new product lines or streamlined sales processes can all help generate revenue once you’re up and running as the new owner.
Step Six: Marketing Due Diligence
How does your target business promote itself? At this stage you’re looking for anywhere there is room for improvement – untapped marketing channels, a weak social media presence, or an outdated website. Bringing your experience in these areas can revolutionise an aging business, introducing it to a whole new audience.
Tip: For a case study in how updating an old business’ digital presence and marketing strategy can lead to success, read These Families Changed Their Lives by Buying a Business - And You Can Too
Green flags at this stage include a detailed marketing plan which clearly lays out activities and budgets. Does your target business really know who its audience are, or could some new market research generate a big return on investment?
Step Seven: Staff and HR
This step is the one that requires a bit of finesse. Some business owners won’t want you speaking to every member of their staff, especially if isn’t common knowledge the business is for sale. Coordinate with the seller here and work together so that you can build a picture of the team you’re going to take on.
Who is irreplaceable in week one? What do the staff contracts entail? Are there any promised bonuses, raises, or informal commitment? On a more human level, how do the staff feel about the business? It’s important to gauge morale, but you don’t want to tread on anybody’s toes while you do so.
Step Eight: Systems and Operations
Running a business requires spinning a lot of plates. If you’re stepping in as the new owner, you need to make sure ownership can be transferred without dropping any. That means you need to check that your target business can run successfully without its current owner steering the ship. The business should have competent heads of department who are able to take initiative, and well-documented Standard Operating Procedures (SOPs).
Tip: For a closer look at why the best way to sell a business is to make it run independently from you, read The Key to Selling Your Business? Make Yourself Redundant
On top of that, there’s questions around security and admin which you should check in with. Who has admin access, passwords, keys, and important contacts? What systems run finance, sales, inventory and operations? What happens if they break?
Step Nine: Customers, suppliers and competition
This is another step of the due diligence process where it pays to really zoom in. You’ve already examined in detail the aspects that are inside the business – but what about external factors that will impact your success?
You should conduct a thorough analysis of competitors within your sector and geographical region. Examine their pricing, positioning and marketing hooks to see what they’re doing differently, and whether it’s working. You’ll also need to take a close look at the relationship your business has with its suppliers, to ensure it isn’t overly dependent on any one of them. Lastly, you need to do a deep dive into who the business’ customers are. Find out where the loyal, repeat customers are, and what exactly it is they want.
Step Ten: Contracts and Legal Due Diligence
You’ll want to seriously consider bringing a lawyer into the equation for this part of the due diligence process, unless you enjoy poring over fine print in long contracts. A legal advisor who has experience in business acquisitions will know what to look for, and the fee you’ll pay them will be well worth the peace of mind that you’re not expecting any sudden shocks when it comes to cost.
Your legal due diligence checklist should include:
- Leases – Assignment clauses, renewal options, true occupancy costs, deposit requirements, landlord reputation.
- Insurance – Is there any required coverage, and how much it will cost to replace?
- Contracts - Supplier, customer and staff contracts, restrictions on changes, transfer fees.
- Licenses/Permits – Does the industry you’re entering into require permits? If it’s a petrol station, a healthcare business, or operates heavy machinery – it does.
- Corporate/Legal – Companies House filings, the shareholder register and statutory registers
- Litigation/Compliance – Any ongoing lawsuits or environmental health compliance issues need to be investigated, as well as planning permission if applicable.
Step Eleven: Build a (Conservative) Pro Forma
A Pro Forma is a forward-looking financial projection that aims to give you a sense of how the business will perform after you take it over. Here’s a simple formula you can use to create one:
Take a conservative estimate of revenue over a sensible timeframe, and then subtract the Cost of Goods Sold to find your Gross Profit. Then, subtract from this the operating expenses, new debt payments, additional professional fees, capex allowance and finally, your salary. This will give you a Projected Net Profit.
A good Pro Forma will include realistic salary estimates and take tax into account, as well as accounting for things like seasonality. It should help you calculate the breakeven point after your take over the business, serving as a stress-test rather than selling you a dream. Crucially, it should also give you an idea of how much working capital you’ll have left to actually run the business – something first-time buyers often get caught out by.
Step Twelve: Decision & Renegotiation
Congratulations! You made it all the way to step twelve. Once you’ve ticked that final box, give yourself a pat on the back and then pull up your sleeves: you’re not quite done yet. Once the due diligence phase is over, the negotiation begins in earnest. This is the stage where you use everything you’ve discovered about your target business to try and get a better price from the seller.
Tip: Remember that good negotiation is about communicating clearly, not ‘winning’. For a deeper dive into the strategies and psychology of the negotiation phase, read our article How to Negotiate when Buying a Business.
Once the negotiation is over – it’s decision time. Even if you’ve put a lot of time and effort into the due diligence process, the most important thing you need to do is be able to walk away. You’ll spend a whole lot more time and money sorting out the mess if you end up buying the wrong business.
And if you do have to walk away, no worries – there’s over 58,000 more businesses for sale on BusinessesForSale.com!