Small Business Acquisition Due Diligence Checklist (What to Verify Before You Close)

A buyer I know got to week five of due diligence before he found out the business's primary location lease had 14 months left and the landlord had no interest in renewing. The seller knew. It wasn't in the CIM. Nobody lied. Nobody volunteered it.

He walked away. Five weeks gone, plus the cost of his attorney's time.

The frustrating part is that lease review is on every due diligence checklist ever written. He had a checklist. He just didn't get to it until week five, after he'd already spent most of his time on the financial review.

Most due diligence checklists are written by lawyers. They're comprehensive, thorough, and organized in the wrong order. They treat every item as equally important. They're not.

This checklist is organized around the items that actually kill deals, in the order you should check them.

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The items most likely to kill your deal

Before the full checklist, here are the six things that end deals most often. Check these first. If any of them fail, you can walk away before you've spent weeks on everything else.

1. SDE that doesn't hold up. The seller's SDE calculation is an argument, not a fact. Rebuild it yourself from the tax returns. If your number is 20%+ below the seller's, the deal is priced wrong.

2. DSCR below 1.25x. The bank will calculate DSCR using their own SDE reconstruction, which is often lower than the seller's. If the deal barely clears 1.25x on the seller's numbers, it probably won't clear it on the bank's. Run this before you go deep on anything else.

3. Customer concentration. One customer representing 40%+ of revenue with no long-term contract is a deal-ender for most lenders and a serious risk for any buyer.

4. Lease that can't be assigned. A landlord who won't consent to the transfer can kill a deal at closing, after months of work. Check the lease in week one.

5. Key person who's leaving. A salesperson who brings in 40% of new business and is planning to leave after the sale is a material change in what you're buying. Ask about this early.

6. Seller who isn't committed. Three months in, they decide not to sell. You can't recover that time. Ask the seller directly in the first or second meeting: "Have you talked to your family about this? Is everyone aligned?" A seller who gets vague is a seller who may not be ready.

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Financial due diligence

Start here. If the numbers don't hold up, nothing else matters.

Tax returns

• Obtain three years of federal business tax returns (not the broker's P&L)
• Confirm net income on tax returns matches the broker's financial summary
• Note any significant year-over-year changes and ask for explanations
• Check for any amended returns

SDE reconstruction

• Rebuild the SDE calculation yourself from the tax returns
• Verify each add-back with documentation (W-2 for owner salary, premium statements for health insurance, invoices for one-time expenses)
• Confirm that "one-time" expenses are actually one-time — check all three years
• Adjust the owner salary add-back if you're not running the business yourself
• Calculate the three-year average SDE and note the trend (growing, flat, or declining)

For a detailed walkthrough of the SDE calculation, read How to Calculate Seller Discretionary Earnings.

Revenue quality

• Request a customer revenue breakdown — who are the top 10 customers and what percentage of revenue do they represent?
• For any customer representing more than 20% of revenue, ask about contract terms and tenure
• Confirm whether revenue is recurring (contracts, subscriptions, repeat customers) or project-based
• Review the last 12 months of bank statements to confirm revenue matches reported figures
• Check for any unusual revenue spikes in the 12 to 18 months before the listing

Accounts receivable

• Request an AR aging report
• Flag any receivables 90+ days old
• Ask about the business's collection history and bad debt write-offs
• Confirm that the AR balance on the books matches what's actually collectible

DSCR check

• Calculate the Debt Service Coverage Ratio using your SDE estimate and your projected loan payments
• SBA minimum is 1.15x; most lenders require 1.25x
• If the deal barely clears 1.25x on the seller's numbers, run the bank's likely SDE calculation before proceeding

Liabilities

• Confirm there are no outstanding loans, liens, or judgments against the business
• Ask for a complete list of all business debts and obligations
• Check for any deferred maintenance or capital expenditures the seller has been postponing

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Operational due diligence

The financial numbers tell you what the business earns. The operational review tells you whether it will keep earning that under new ownership.

The site visit

• Visit the facility in person — don't skip this
• Assess the condition of equipment, inventory, and physical assets
• Talk to employees (with the seller's permission)
• Look for deferred maintenance, outdated equipment, or anything that will require near-term capital

Processes and documentation

• Ask for the operations manual — if it doesn't exist, that's a flag
• Review standard operating procedures for the most common tasks
• Identify which processes exist only in the owner's head
• Assess how long it would realistically take to learn the business without the seller

Key person risk

• Identify every person whose departure would materially affect the business
• Ask about compensation, tenure, and whether any key employees know the business is for sale
• Confirm that key employees are not planning to leave after the sale

Customer relationships

• Ask the seller: "If I called your top five customers today and told them you were selling, how would they react?"
• For businesses where customer relationships are personal to the owner, assess the transition risk explicitly
• Review any customer contracts for change-of-control clauses

Supplier relationships

• Review key supplier contracts and confirm they can be transferred
• Ask whether any supplier relationships are personal to the owner
• Check for any supplier concentration risk

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Legal due diligence

Legal due diligence is about confirming that you can actually own and operate this business after closing, and that you're not inheriting hidden liabilities.

Leases (check this in week one)

• Review the lease for the business's primary location
• Confirm the lease term — how long is left, and what are the renewal options?
• Check for landlord consent requirements for assignment
• Contact the landlord early to confirm they'll consent to the transfer

Contracts and agreements

• Review all material contracts: customer contracts, supplier agreements, service agreements
• Check each contract for change-of-control clauses that could trigger termination or renegotiation
• Confirm that contracts can be assigned to the new owner

Licenses and permits

• Confirm that all required licenses and permits are current
• Verify that licenses can be transferred to a new owner (some are personal to the licensee)
• Check for any industry-specific regulatory requirements that apply to the new owner

Litigation and disputes

• Ask the seller directly: "Is there any pending or threatened litigation against the business?"
• Search court records for any judgments or liens against the business
• Review any past legal disputes and their resolution

Business structure and ownership

• Confirm the legal structure of the business (LLC, S-Corp, C-Corp)
• Verify ownership — confirm the seller actually owns what they're selling
• Check for any minority owners or equity holders who need to consent to the sale

Employment

• Review employee agreements, especially non-competes and confidentiality agreements
• Confirm there are no outstanding wage claims or labor disputes
• Understand the seller's obligations to employees under the purchase agreement

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Seller commitment check

This one doesn't fit neatly into a category, but it's one of the most important items on the list.

• Ask the seller directly: "Have you talked to your family about this decision? Is everyone aligned?"
• Ask: "What does your life look like after the sale?" A seller with a specific, concrete answer has mentally moved on. A seller who gets vague hasn't.
• Watch for signs of wavering commitment throughout the process

A seller who isn't fully committed will waste months of your time. Catching this early costs you nothing. Catching it late costs you everything.

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How to manage the timeline

You have 45 to 60 days of exclusivity. Here's how to use it:

Week 1: Financial due diligence and lease review. Get the tax returns, rebuild the SDE, run the DSCR, check the lease. If any of the six deal-killers surface, walk away now.

Weeks 2 to 3: Operational due diligence. Site visit, employee conversations, process review, customer relationship assessment.

Weeks 3 to 4: Legal due diligence. Contracts, licenses, litigation check. Your attorney handles most of this.

Weeks 4 to 6: Financing. Your lender is running their own underwriting in parallel. Stay in close contact and respond to requests within 24 hours.

Week 6+: Closing preparation. Purchase agreement review, final conditions, wire transfers.

The biggest mistake buyers make is running these phases sequentially instead of in parallel. Financial, operational, and legal due diligence should all be running at the same time, with financing starting the moment you sign the LOI.

The buyer I mentioned at the start eventually closed a different deal. He checked the lease in week one. It had four years left with two five-year renewal options. The landlord was cooperative. He knew by day three that the location wasn't a risk. Everything else he found was manageable.

The checklist didn't change. The order did.

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AcquiPilot's deal evaluation workflow tracks every due diligence item across all four workstreams — financial, operational, legal, and financing — so nothing falls through the cracks. Start for free.