Due Diligence Checklist

Everything you need to prepare to satisfy buyer due diligence

Due diligence is the buyer's process of verifying everything you have told them about your business. It typically lasts 4-8 weeks and covers financial, legal, operational, and commercial areas. Being prepared with organized documentation can speed the process, prevent deals from falling apart, and demonstrate professionalism that justifies premium pricing.

This checklist provides a comprehensive list of documents buyers typically request. Prepare these in advance and organize them in a virtual data room. Having documentation ready from day one signals professionalism and can accelerate the process significantly.

Financial Documents

Financial documents form the foundation of due diligence. Buyers will examine these carefully to understand historical performance, assess quality of earnings, and verify the information you have provided.

Income statements, balance sheets, and cash flow statements for the past three years—monthly for the most recent year and annually for prior years. Include any interim statements for the current year. Ensure these are prepared on an consistent basis and reconcile to tax returns.

Tax returns—federal, state, and local—for the past three years. Include all returns filed including extensions. Buyers will reconcile financial statements to tax returns and look for any discrepancies that might indicate issues.

Bank statements and reconciliations for all accounts for the past three years. Include monthly reconciliations that show all transactions and adjustments. Buyers will verify cash balances and look for any unusual transactions.

Accounts receivable aging reports—current, 30 days, 60 days, 90 days, and over 90 days—for the past 12 months. Show total receivables, any reserves, and collection history. Buyers will assess the quality of receivables and whether reserves are adequate.

Accounts payable aging reports—current, 30 days, 60 days, 90 days, and over 90 days—for the past 12 months. Include any notes payable schedules and vendor agreements. Buyers will assess payment patterns and any disputed amounts.

Inventory records including inventory schedules, aging by category, obsolescence reserves, and turnover analysis. For businesses with significant inventory, include physical inventory counts and reconciliation to general ledger.

Debt agreements including all loan documents, credit line agreements, and any debt covenants. Include payment schedules, collateral descriptions, and covenant compliance certificates for the past 12 months.

Capital expenditure records for the past three years showing fixed asset purchases, disposals, and depreciation. Include a schedule of fixed assets with cost, accumulated depreciation, and net book value.

Budgets and forecasts including annual budgets, rolling forecasts, and any strategic plans. Show the assumptions underlying the forecasts and compare historical performance to budgets.

Customer agreements and contracts including all customer contracts, price lists, and terms and conditions. Include any contracts that are material to the business or have unusual terms.

Supplier agreements including all vendor contracts, pricing agreements, and supply agreements. Include any sole-source or critical supplier relationships that could affect the business.

Corporate Documents

Corporate documents establish the legal structure and governance of the business. Buyers will review these to understand ownership, authority, and any potential legal issues.

Articles of incorporation, bylaws, and amendments for the entity and any subsidiaries. Include any merger or acquisition documents if the business has acquired other companies.

Board meeting minutes and resolutions for the past three years. Include any committee minutes such as audit committee or compensation committee. Show major decisions and approvals.

Stock certificates and cap table showing current ownership, including all equity classes. Show any restrictions on shares, vesting schedules, or agreements affecting transfer.

Employee agreements including employment contracts for key employees, offer letters, and any severance agreements. Include documentation of any employee handbooks or policies.

Compensation records showing salary, bonus, and benefit information for all employees. Include any deferred compensation arrangements, non-compete agreements, or change of control provisions.

Stock option plans, stock purchase plans, and any equity incentive programs. Include plan documents, grant agreements, and a schedule of all outstanding grants with vesting status.

Intellectual property registrations including patents, trademarks, copyrights, and domain names. Include any licensing agreements for intellectual property you use or have licensed to others.

Material contracts beyond customer and supplier agreements including joint venture agreements, partnership agreements, and any contracts with related parties.

Litigation history including any pending litigation, settlements, judgments, and any pre-litigation notices or demand letters. Include any insurance claims history relevant to litigation.

Disclose all litigation to buyers upfront. Discovering litigation during due diligence destroys trust and can kill deals. Be proactive about disclosure and be prepared to explain the facts and context.

Operational Documents

Operational documents show how the business runs day-to-day. Buyers want to understand operations to assess integration requirements and identify any operational risks.

Supplier lists including all vendors, their contact information, and key terms. Identify any critical suppliers and show the history and terms of relationships.

Customer lists including all customers, contact information, purchase history, and any relationship notes. Show customer segmentation, concentration analysis, and retention data.

Employee organization chart showing reporting relationships, headcount by department, and key positions. Include any succession planning documentation and identify key personnel.

IT systems documentation including hardware inventory, software licenses, network architecture, and any IT support arrangements. Include any data security policies and incident history.

Insurance policies and claims history including property, liability, workers compensation, and D&O insurance. Show policy limits, deductibles, and any claims in the past five years.

Licenses and permits including business licenses, industry-specific permits, environmental permits, and any regulatory filings. Show compliance history and any citations or violations.

Environmental assessments if applicable including Phase I and Phase II environmental reports, remediation records, and any environmental permits or compliance documentation.

Preparing Your Data Room

Organize all documents in a virtual data room using a platform like ShareFile, Box, or Intralinks. Create a logical folder structure that makes it easy for buyers to find information. Include an index or table of contents that explains what's in each folder.

Set appropriate access controls so you can track who is viewing what documents. This provides insight into buyer interest and helps you understand which areas are receiving most attention.

Be prepared to provide additional documents as buyers identify areas of interest. Due diligence often reveals new questions that require additional documentation. Having an organized approach allows you to respond quickly.

Designate a point person to manage data room access and respond to document requests. This ensures consistent handling and prevents confusion about what has been provided.

Key Takeaways

•Financial: statements, tax returns, bank statements, AR/AP aging, inventory, debt agreements
•Corporate: formation docs, minutes, cap table, equity plans, IP registrations, litigation
•Operational: supplier/customer lists, org chart, IT systems, insurance, licenses
•Prepare data room with organized structure before going to market
•Disclose issues proactively rather than having buyers discover them

Frequently Asked Questions

How long does due diligence take?

Due diligence typically takes 4-8 weeks depending on the complexity of the business and the thoroughness of the buyer. Larger transactions or businesses with more complexity may take longer.

Can I refuse to provide certain documents?

You can decline to provide some documents, but refusing reasonable due diligence requests may kill the deal. Buyers need certain information to complete their analysis and make an informed decision.

What if I don't have all the documents requested?

Be transparent about missing documents and explain why they are not available. Buyers will understand if records were lost in a fire or similar event, but missing documentation without explanation raises concerns.

Should I do my own due diligence before selling?

Yes, conducting your own due diligence helps you identify and address issues before buyers find them. Consider hiring a professional to conduct a mock due diligence exercise.

How do I protect confidential information in the data room?

Use a professional data room platform with access controls and watermarking. Only grant access to serious buyers who have signed non-disclosure agreements. Track document access to identify any issues.

Prepare for Due Diligence

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This article is part of our Exit Preparation: Get Your Business Ready to Sell guide.