Due Diligence Demystified: What Buyers Will Ask For

Due diligence is the deep-dive review buyers perform after signing a Letter of Intent (LOI). It verifies the accuracy of your business’s financials, operations, contracts, and compliance before closing the sale.

To prepare:

1. Get your financials clean and organized.

2. Document operations, processes, and customer contracts.

3. Disclose risks and issues upfront.

4. Stay responsive and calm — diligence takes time.

The better prepared you are, the smoother (and faster) your closing will be.

When the Real Work Begins

You’ve signed the LOI — congratulations. But if the LOI was the “let’s date exclusively” phase, due diligence is meeting the family.

It’s where the buyer verifies everything you’ve told them about your business. It can feel invasive, exhausting, and at times personal. But it’s not an interrogation — it’s a validation process.

At Sixty74, we’ve seen great businesses shine during diligence because they were organized, transparent, and honest. We’ve also seen strong deals stall when sellers weren’t ready for the depth of review.

This guide walks you through what diligence really involves, what buyers will ask for, and how to prepare without losing your mind.

What Is Due Diligence, Exactly?

Due diligence is the buyer’s comprehensive investigation into your business before closing.

The goal: to confirm the company is what it appears to be — financially, legally, and operationally sound.

Key categories include:

• Financial due diligence – verifying revenue, expenses, and profitability.

• Legal due diligence – reviewing contracts, leases, IP, and any disputes.

• Operational due diligence – assessing people, processes, and infrastructure.

• Tax and compliance due diligence – confirming filings and obligations.

• Commercial due diligence – understanding customer base, market position, and growth potential.

The process usually lasts 30–90 days, depending on deal size and complexity.

Why Buyers Do It

Buyers spend real money on diligence — hiring accountants, lawyers, and consultants. Their goal isn’t to catch you out; it’s to confirm what they’re buying and ensure the price fits reality.

They want to:

• Verify the business’s financial health.

• Identify hidden risks or liabilities.

• Confirm future earnings potential.

• Build a roadmap for post-close operations.

What Buyers Will Ask For

Here’s what to expect by category:

1. Financial Documentation

• 3–5 years of financial statements (income, balance sheet, cash flow).

• General ledger detail.

• Tax returns (business and, if relevant, owner).

• Accounts receivable and payable aging reports.

• Inventory listings and valuation methods.

• Debt schedules and loan agreements.

• Budget vs. actual performance.

Tip: Ensure all numbers reconcile. Diligence teams spot inconsistencies instantly.

2. Legal and Corporate Documents

• Articles of incorporation or organization.

• Bylaws or operating agreement.

• Shareholder or member records.

• Minutes of board or management meetings.

• Material contracts (customers, vendors, suppliers).

• Lease agreements.

• IP documentation (trademarks, copyrights, patents).

• Litigation history or pending claims.

Tip: Disclose problems early. Hidden legal issues are the #1 deal-killer.

3. Tax and Compliance Records

• Federal, state, and local tax returns.

• Payroll tax filings.

• Sales tax compliance reports.

• Employment law compliance.

• Licenses and permits.

• Environmental and safety records.

Tip: If you’ve had a recent audit, provide the findings. Transparency builds trust.

4. Operational Information

• Organizational chart and employee roster.

• Job descriptions and compensation data.

• Vendor and supplier lists.

• Customer contracts and renewal rates.

• Equipment list and maintenance records.

• IT systems overview and software licenses.

Tip: Buyers don’t just buy numbers; they buy operations. The clearer your systems, the more confidence they’ll have.

5. Commercial Insights

• Top 10 customers and revenue concentration.

• Marketing materials and sales process documentation.

• Competitive landscape and market share.

• Growth plans or backlog reports.

Tip: Expect questions about customer retention and churn — buyers want to know what’s stable and what’s at risk.

The Seller’s Experience: What It Feels Like

Most sellers describe diligence as “drinking from a firehose.” You’ll get dozens of document requests, sometimes in a data-room checklist hundreds of items long.

It’s normal to feel:

• Frustrated by repetitive questions.

• Protective of sensitive information.

• Nervous about losing control.

But remember: diligence is how buyers get comfortable. The more prepared you are, the faster it ends.

How to Prepare Before Diligence Starts

1. Create a Digital Data Room

Use a secure folder (e.g., Dropbox, SharePoint, DealRoom, or Firmex) to organize documents. Label them clearly by category.

2. Assign a Point Person

Whether it’s you, your controller, or your attorney, designate one person to handle requests and maintain consistency.

3. Review Your Financials

Ask your CPA to conduct a “pre-diligence” review to spot inconsistencies before the buyer does.

4. Clean Up Contracts and Records

Renew expired agreements, resolve open disputes, and organize licenses.

5. Communicate Internally (Carefully)

If key employees will assist with diligence, bring them in early and set clear expectations for confidentiality.

Common Pitfalls

The Buyer’s Quality of Earnings (QoE) Review

For larger or financed transactions, the buyer may commission a Quality of Earnings (QoE) report.

Purpose: To verify that your earnings are sustainable and accurately presented.
It analyzes:

• Revenue recognition policies.

• Add-backs and adjustments.

• One-time expenses.

• Seasonality and customer concentration.

If you’ve already done a sell-side QoE before going to market, you’re ahead of the game — it signals professionalism and builds buyer trust.

Your Advisors’ Role During Diligence

• CPA: Reviews numbers, assists with financial responses, supports QoE process.

• Attorney: Manages legal documents, protects disclosures, and negotiates reps/warranties.

• Broker or M&A advisor: Keeps momentum, mediates buyer-seller communication, and ensures deadlines stay on track.

Internal link: See What Brokers Wish Sellers Knew Before Listing for how brokers help streamline this phase.

How Long It Takes — and When to Worry

Most diligence phases last 45–90 days, depending on deal complexity.

Green flags:

• Clear communication and steady document flow.

• Buyer’s team asks good questions and provides updates.

Red flags:

• Buyer goes silent for long stretches.

• Endless new requests without progress.

• Major re-trades on price without clear justification.

If it drags past 120 days, reassess whether the buyer is committed or stalling.

Emotional Management: Staying Centered

Diligence is where deals are won or lost emotionally. Sellers often feel second-guessed, exhausted, or anxious about “losing control.”

Mindset tips:

• View diligence as collaboration, not confrontation.

• Answer honestly — don’t spin. Buyers respect transparency.

• Protect your time. Set communication blocks and let advisors handle details.

The Bottom Line: Diligence Is Proof You Built Something Worth Buying

If the LOI is about interest, diligence is about trust. This is your opportunity to show the depth, resilience, and credibility of what you’ve built.

When handled with preparation and transparency, diligence doesn’t just confirm value — it reinforces it. At Sixty74, we believe deals should validate great businesses, not drain them.

If you’re interested in selling your business, let’s talk.