Due Diligence
The investigation period where a buyer verifies what the business actually is.
01
What It Means
Due diligence is the defined period during which a buyer examines the business: financial statements and tax returns, customer and supplier concentration, employee and payroll records, leases, licenses and permits, equipment condition, litigation history, insurance, and any real estate involved.
When real property is part of the transaction, real estate due diligence — title, survey, inspection, environmental review, and zoning — runs alongside the business review, often on a different timeline.
02
Why It Matters
It is where price assumptions are tested. Findings can confirm the valuation, support a renegotiation, or end the transaction before closing.
It is also where financing gets decided. Lenders rely on the same records, and gaps in documentation slow or stop underwriting.
Diligence is coordination work as much as review work, involving the CPA, attorney, lender, appraiser, inspector, and title company in parallel.
03
Common Misconceptions
- "Reviewing the financials is due diligence." Contracts, licenses, employees, equipment, and real estate all matter too.
- "The seller will disclose anything important." Disclosure obligations exist, but verification is the buyer's responsibility.
- "There is plenty of time." Diligence periods are finite, and third parties do not always respond quickly.
- "Real estate diligence can wait until the business review is finished." Title, environmental, and survey work often take the longest.
04
Questions to Ask
- How long is the due diligence period, and can it be extended?
- What documents will be provided, and when?
- Are tax returns consistent with the financial statements presented?
- How concentrated are revenue and supplier relationships?
- What real estate, environmental, and title review is needed?
05
Related Reading & Resources
The most successful real estate decisions often involve collaboration between several professionals working toward the same goal. Understanding each person's role helps you ask better questions and make more confident decisions.
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Other Business Sale Terms
- Asset SaleThe buyer purchases specific business assets rather than the legal entity that owns them.
- Stock SaleThe buyer purchases the ownership interest in the entity, and the business continues intact.
- GoodwillThe intangible value of a business beyond its tangible assets — reputation, customers, and earning capacity.
- EBITDAEarnings before interest, taxes, depreciation, and amortization — a common starting point for valuing a business.
- Seller FinancingThe seller carries part of the purchase price as a note, and the buyer repays over time.
- Non-Compete AgreementA negotiated limit on the seller competing against the business they just sold.
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