After you sign a Letter of Intent with a buyer, you enter the most intensive phase of the business sale process: due diligence. For many sellers, this period, typically 45 to 90 days, is equal parts exciting and stressful.
Understanding what to expect, and how to prepare for it, can make the difference between a smooth closing and a transaction that falls apart at the finish line.
What Is Due Diligence?
Due diligence is the buyer's formal process of verifying everything they need to confirm before committing to the final purchase. Think of it as the deep inspection that happens after you have agreed on a price but before you sign the final deed.
It covers three primary areas: financial, operational, and legal. Depending on the size and complexity of the business, it may also include customer, HR, and industry-specific reviews.
What Buyers Look At, and Why
Financial Due Diligence
Financial review is almost always the most intensive component. Buyers and their accountants will examine:
- Three years of business tax returns
- Three years of profit and loss statements
- Current balance sheet and accounts receivable aging
- Owner compensation and any personal expenses run through the business
- Month-over-month revenue trends
- Customer concentration (any single customer representing more than 20-25% of revenue)
The goal is to verify the Seller's Discretionary Earnings (SDE) figure: the number your purchase price is based on. Any material discrepancy between what was represented and what the documents show will either reduce the purchase price or terminate the deal.
Operational Due Diligence
Buyers will want to understand how the business actually runs:
- Key employees: who they are, their tenure, and their compensation
- Customer relationships: are they contractual, recurring, or transactional?
- Vendor and supplier relationships and terms
- Equipment condition and maintenance history
- Technology systems: CRM, scheduling, invoicing, payroll
- Licenses, certifications, and any regulatory compliance requirements
Legal Due Diligence
Legal review covers:
- Business entity documents and ownership structure
- Any existing contracts with customers, vendors, or employees
- Lease agreements if the business occupies commercial space
- Any pending or historical litigation
- IP ownership: trademarks, trade names, proprietary processes
How Long Does Due Diligence Take?
For a typical service business acquisition in the $1M to $2M range, due diligence runs 45 to 75 days from the date of signed LOI. Delays are most commonly caused by missing financial documents, unclear ownership records, or unresolved legal questions.
The single best thing a seller can do to accelerate this process is to prepare a clean due diligence package before the LOI is even signed. This includes organized financials, clear corporate documents, and upfront disclosure of anything that might surface as a question.
Your Role as the Seller During Due Diligence
You are not passive in this process. Your cooperation, responsiveness, and transparency directly affect how long diligence takes and whether the deal closes cleanly.
- Respond to document requests within 48 hours
- Be honest about the business, including its weaknesses
- Keep running the business as you normally would, with no unusual decisions
- Maintain discretion: employees should not know about the sale until closing
- Stay in close communication with your attorney and accountant
Undisclosed personal expenses running through the business. If you have been paying for personal vehicles, travel, or health insurance through the business, and have added these back in your SDE calculation, they must be clearly documented and disclosed upfront. Surprises discovered during diligence erode trust fast.