The due-diligence checklist that actually matters

Order matters more than completeness

Most checklists are alphabetical. That is exactly wrong. You want the items that kill deals at the top, because every week you spend on a deal that was never going to close is a week of a finite search.

Work in this order.

Stage one — before you spend a penny

These four answers cost the seller nothing and resolve most bad deals in a week.

1. Who is the legal seller, and do they own what they are selling? Ask for the exact entity name and check it against the state corporate registry. Two entities operating at one address is common and not sinister — but you cannot buy assets from a company that does not own them.

2. What are the last twenty-four months of actual sales? Bank statements, POS reports and sales-tax filings. Not a spreadsheet. If these do not exist or will not be produced, stop — everything else you might do rests on numbers you cannot check.

3. What does the lease actually say? The whole lease with every amendment. Term, options, assignment, escalators, guaranty, who fixes what. A listing summary is not a contract, and lease term determines what a lender will finance.

4. How many hours does the owner work, and doing what? Cross-check the answer against payroll as a share of revenue. If those two numbers disagree, one of them is wrong, and it is usually the answer rather than the payroll register.

If any of these four comes back badly, walk. You have spent nothing.

Stage two — before the LOI

Financial

• Business tax returns for three years
• Monthly P&Ls for twenty-four months
• Balance sheet
• Add-back schedule with a document reference for every line over $2,000
• Payroll register and quarterly filings
• Aged inventory report with vendor invoices
• Aged receivables and payables
• Any supplier settlement, commission or rebate statements

Commercial

• Customer concentration: revenue by customer for two years
• Supplier concentration and any exclusive agreements
• Pricing history and any planned increases
• Hourly or daily sales by period, if it is a retail or hospitality business

People

• Headcount, roles, tenure, pay
• Which staff are essential and which know it
• Any employment agreements, non-competes or accrued liabilities

Stage three — after the LOI, before closing

Legal & entity

• UCC, lien, judgment and tax-lien searches against every relevant entity
• Litigation history
• Bulk-sale or sales-tax clearance where your counsel advises — successor liability for unpaid sales tax is real
• Written proof of ownership of trade names, phone numbers, domains and social accounts

Lease & landlord

• Written landlord consent to assignment
• Written confirmation that renewal options survive and are exercisable by you
• Estoppel certificate confirming no default and the current rent
• CAM reconciliation history

Licences & compliance

• Every licence the business needs, its current holder, and whether it transfers or must be reapplied for
• Inspection history for three years, from the issuing authority rather than a summary site
• Any open compliance items and evidence they were closed

Physical & environmental

• Equipment condition survey and remaining useful life
• Service contracts and warranty status
• For any site with a process history — fuel, dry cleaning, auto, manufacturing — the state environmental file, tank records and a written indemnity that survives assignment

Insurance

• Loss runs for five years. Claims history tells you things nobody will say out loud.

The documents that punch above their weight

Tax returns. The one set of figures the seller filed with a government agency. Everything else is a document they prepared for you.

Bank statements. Deposits either match reported sales or they do not.

Payroll register. Settles the owner-labour question in one page.

Loss runs. Five years of insurance claims will tell you about the roof, the slip-and-falls and the staff turnover.

The lease. More small acquisitions are damaged by lease terms than by earnings surprises.

Two habits worth having

Ask for things in writing, and get answers in writing. Not because you expect a dispute, but because a written answer is a warranty you can attach to a purchase agreement, and a verbal one is not.

Keep a running list of unanswered items. The pattern of what does not arrive is more informative than any single document. A seller who produces four things quickly and then goes quiet on the fifth has told you which one to look at hardest.

And know your stop conditions in advance

Write down, before you are emotionally invested, the things that would make you walk. Documented earnings below a figure. A landlord who will not consent. A licence that will not transfer. An environmental file with an open discharge.

Deals develop momentum. Decide what would stop you while stopping is still easy.