Due diligence is the buyer’s investigation period. It’s when they pull back the curtain and really look at your business. They examine your financials, interview your customers, review your contracts, check your legal exposure, and basically try to make sure you weren’t exaggerating and the business is what you said it was.

Due diligence typically lasts 30 to 90 days, depending on how complex your business is. It’s a stressful phase for sellers because your business is under a microscope. But here’s the important part: it’s also where many deals fall apart.

Why? Because owners who haven’t prepared often have surprises. A customer relationship that seemed solid turns out to be shakier than expected. Financials don’t align perfectly with bank statements. An old legal issue comes up. A key employee hasn’t actually committed to staying. These discoveries give the buyer an excuse to renegotiate down or walk away.

What Buyers Look At

Due diligence is systematic. A buyer’s team will request financial statements for the past three to five years, tax returns, bank statements, and detailed profit-and-loss records. They’ll want to see aging reports on accounts receivable, details on customer concentration (are you relying too heavily on a few big customers?), and explanations for any unusual transactions.

They’ll also dig into your contracts. What are your major customer agreements? Vendor agreements? Any non-competes or licensing agreements? Are there any contracts that won’t survive the change of ownership? A buyer needs to know this stuff because they’re inheriting the obligations.

On the operational side, they’ll want to understand your team. How many employees? What are their salaries and responsibilities? Will they stay after the sale? They’ll review your systems and processes, your inventory (if applicable), your facilities, and your technology infrastructure.

Legally, they’ll look for any lawsuits, settlements, regulatory compliance issues, or liens against the business. They’ll verify you own all your intellectual property. They’ll check insurance coverage.

Why Preparation Is Key

The businesses that sail through due diligence are the ones where owners have already organized everything. All your financial documents are in one place and easy to access. Your customer contracts are clearly documented. You have updated employee agreements. You can explain any unusual transactions. You know your liabilities and you’ve disclosed them upfront.

Transparency builds confidence. If you come out swinging with organized documentation and honest answers, a buyer feels like you have nothing to hide. If they have to ask for documents repeatedly or you seem to be hiding something, they get nervous and start digging harder.

Getting Ahead of It

Here’s what to do before you go to market: create a due diligence binder. Put together three to five years of tax returns, profit-and-loss statements, balance sheets, and bank statements. Organize your customer agreements, vendor agreements, and employee documents. List out any lawsuits, insurance claims, or regulatory issues. Document your key processes and technology.

Have your accountant review your financials so you’re not surprised by what they show. Make sure you can explain add-backs (remember SDE?) with documentation. If there are red flags—a customer that left, a lawsuit that settled, an employee who’s planning to leave—address those proactively in your materials. A buyer respects transparency more than perfect financials.

The Due Diligence Timeline

Your Letter of Intent will specify how long due diligence lasts. Don’t agree to a timeline that’s too tight. 45 to 60 days is standard; 90 days is reasonable for a larger or more complex business. Give yourself breathing room because due diligence involves constant document requests and clarification calls.

During this phase, the buyer will also likely conduct their own valuation review to confirm the purchase price makes sense. If they uncover something material that changes their valuation, they might renegotiate. This is normal, though it’s uncomfortable.

Mitigating Risk

The biggest risk in due diligence is discovering something that derails the deal. You mitigate that by being proactive: get everything organized early, disclose potential issues upfront, and have strong documentation behind all your claims. If you’ve made SDE add-backs, have receipts. If you’ve claimed recurring revenue, show the contracts.

Due diligence feels like scrutiny because it is scrutiny. But it’s also your chance to demonstrate that your business is solid, well-run, and worth the price you’re asking. Buyers expect due diligence to raise questions; they don’t expect to find you’ve been hiding material issues. Prepare accordingly.