Question 1

What does due diligence mean in a business sale?

Accepted Answer

Due diligence is the buyer's investigation of your business to verify that everything represented in the marketing is accurate and that there are no undisclosed issues. It covers financials, operations, legal, employees, customers, contracts, licenses, and real estate. Most due diligence periods last 30–60 days after an LOI is signed.

Question 2

What financial documents will buyers request?

Accepted Answer

Standard financial due diligence requests: 3 years of P&L statements (monthly detail), 3 years of tax returns (business and personal in some cases), current year P&L (YTD), last 12 months of bank statements, accounts receivable aging, accounts payable listing, equipment list with values, lease agreements, loan documents, and payroll records.

Question 3

What operational documents will buyers request?

Accepted Answer

Operational due diligence: employee list (names, roles, compensation, start dates), customer list (with revenue history), service agreements and maintenance contracts, equipment list with age and condition, vehicle list, software systems used, insurance certificates, licenses and certifications, any pending litigation, and a list of key suppliers.

Question 4

What kills deals during due diligence?

Accepted Answer

Top deal-killers: financials don't match what was represented (revenue or SDE was overstated), key employees leave during the process, a major customer cancels, undisclosed legal/regulatory issues surface, equipment is in worse condition than represented, environmental issues, unlicensed work, or materially declining performance after the LOI date.

Question 5

How do I organize for due diligence?

Accepted Answer

Create a secure data room (Google Drive, Dropbox, or a dedicated virtual data room platform) with clearly organized folders: Financial (P&Ls, tax returns, bank statements), Legal (licenses, contracts, permits), Operations (equipment, employees, customers), Insurance, and Real Estate. Having everything organized before buyers ask shows professionalism and speeds the process.

Question 6

Will buyers talk to my employees during due diligence?

Accepted Answer

Usually not until very late in the process — typically after a purchase agreement is signed and only with key management employees (if any). Broad employee interviews during active diligence would blow confidentiality. PE buyers sometimes request management team meetings during diligence, but these are controlled, pre-arranged conversations, not open interviews.

Question 7

Will buyers talk to my customers during due diligence?

Accepted Answer

Rarely for individual buyers. PE buyers may request calls with 2–3 key customers as a reference check, but only with your permission and only for the largest accounts. This is always pre-arranged and often occurs near the end of diligence, not at the beginning. Your broker manages this process to protect confidentiality.

Question 8

What is a 'material adverse change' clause?

Accepted Answer

A material adverse change (MAC) clause in a purchase agreement allows the buyer to back out if something significant and negative happens to the business between LOI signing and closing. Examples: a major customer cancels, revenue drops 20%+, a key employee leaves, or a regulatory issue surfaces. Understanding your MAC clause protects you from arbitrary buyer exits.

Question 9

What are representations and warranties?

Accepted Answer

Reps and warranties are statements you make in the purchase agreement that are true as of closing: the financials are accurate, you have the legal right to sell the assets, no undisclosed litigation exists, licenses are current, etc. Breaches of reps and warranties after closing can result in indemnification claims. Disclose known issues upfront rather than hoping they're not discovered post-close.

Question 10

What is an escrow or holdback at closing?

Accepted Answer

Buyers often request a portion of the sale price (5–15%) be held in escrow for 12–18 months post-closing as security against rep and warranty breaches or working capital adjustments. This is common in PE deals. Negotiate the size, duration, and release conditions carefully — you want access to your escrow as quickly as possible.

Question 11

How long does due diligence typically take?

Accepted Answer

Individual buyer due diligence: 30–45 days. PE buyer due diligence: 45–75 days (includes QoE report which takes 3–4 weeks). SBA-financed deals add another 30–45 days for lender underwriting. Total time from LOI to close: 60–120 days for individual buyers, 90–150 days for PE transactions.

Question 12

What if a buyer re-trades the price during due diligence?

Accepted Answer

Re-trading (lowering the price after LOI based on diligence findings) is common. If the re-trade is based on legitimate findings (financials were overstated, equipment needs replacement), it's expected. If it's a negotiating tactic based on manufactured issues, push back hard or walk. An experienced broker protects sellers from abusive re-trading by setting clear expectations and having backup buyers ready.

Due Diligence: 12 Questions Answered

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