Key Insight
Due diligence is not a box to check — it's the only opportunity you'll have to discover problems before they become your problems. Most buyers underinvest here and overpay as a result.
The Five Workstreams
1. Financial due diligence Verify the accuracy of reported financials: reconcile bank statements to P&L, validate add-back claims, test accounts receivable collectibility, assess working capital, review TTM revenue composition. For deals above $1.5M, typically done by a third-party CPA via a QoE report.
2. Legal due diligence Review corporate documents (formation, ownership, capitalization), material contracts (customer, vendor, lease), litigation history, regulatory compliance, IP ownership, employment agreements. Conducted by the buyer's acquisition attorney.
3. Operational due diligence Understand how the business actually runs: management structure, key processes, technology stack, customer service approach, vendor relationships. Identifies operational dependencies and integration risks.
4. Tax due diligence Review tax returns for accuracy and identify exposure: payroll tax filings, sales tax compliance, prior audits, related-party transactions. More critical in stock sales where liabilities transfer.
5. HR/people due diligence Employee roster, compensation, key employee agreements, benefit obligations, any pending labor claims. Assess whether the team will stay post-close and what retention incentives are needed.
The Standard Timeline
Most SBA acquisition deals run a 45-75 day due diligence and closing process from LOI signing:
- Week 1-2: Data room access, financial document review begins
- Week 2-4: QoE report in process, legal review begins
- Week 3-5: Customer and employee interviews, operational visits
- Week 4-6: Legal document drafting, lender underwriting
- Week 6-9: Purchase agreement negotiation, lender approval
- Week 8-12: Closing
What Buyers Miss
- Customer interviews: Most buyers never directly interview customers. Direct conversations reveal dependency and transferability risks that documents don't.
- Employee conversations: The person who actually does the work knows more about operational risk than any document.
- Vendor conversations: Exclusive supplier relationships or above-market vendor terms don't always appear in financials.
- The second look at the bank statements: Always reconcile all deposits to revenue. Unexplained deposits are cash revenue. Unexplained cash revenue is undisclosed income — taxed improperly and potentially inflating reported SDE.
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