What Buyers Look At in Due Diligence When You Sell a Business

A buyer rebuilds your profit from scratch, reads your contracts and checks who has a claim on your assets. Most of what they find is fixable if you look first.

Not tax or legal advice. This article is general information based on my own experience selling a business. Every business and deal is different. Talk with your own CPA, attorney and financial advisor before acting on anything here.

The short answer

In due diligence, a buyer checks whether your business is what you said it is. Their accountants rebuild your earnings in a quality of earnings review, and their lawyers review your contracts, leases, employee agreements and ownership, and search for liens, judgments and other recorded claims against the business. Anything that lives in a handshake or in your head becomes a question, and questions cost time and sometimes money.

Due diligence was the first honest report card my business ever got

I expected to hate due diligence: months of requests, spreadsheets and lawyers. Instead, I loved it. For the first time, someone looked at my business the way an outsider would, and it showed me how I would have run it differently.

The quality of earnings review

The buyer's accountants don't take your word for your profit. They rebuild it from your records to see what is real and what will keep happening after you leave. Every one-time expense, every personal cost running through the business and every adjustment you claim gets tested. (More on adjustments in SDE or EBITDA.)

Legal diligence, and the lien I didn't know about

The buyer's lawyers review contracts, leases, employee agreements and who owns what. They also run lien searches. One of them, a UCC search, shows recorded security interests in your equipment and other business property. Separate searches cover things like tax liens, judgments and real estate.

Ours found that one of our equipment suppliers had a lien filed against my business. We were completely current on our payments. The lien was simply one of the terms in their contract, and I had never noticed it. It was easy to clear, but it had to be cleared before we could close. Finding something like that the week before closing, with a harder fix, can delay or derail a deal.

What to do about it

None of this was hard. Most of it I could have been doing all along. So now I recommend running a small version of diligence on yourself every year:

Pull your top customer, supplier and lease contracts and read them.
Ask your attorney to run UCC and other lien searches on your business.
Look at your books the way a stranger would.
Write down what only lives in your head.

Do it for yourself, not for a buyer. You'll make better decisions, and if a buyer shows up, you'll be ready.

One thing to try this week

Pretend a buyer asks for your documents next month. Which three would you be embarrassed to hand over? Start there.

What does a buyer actually look at in due diligence?