What does due diligence look like for selling a small business?
Due diligence is the buyer’s verification process. After they’ve expressed serious interest and you’ve agreed on general terms, they get access to your records to confirm what you’ve told them is accurate. The goal is making sure the business actually performs the way you represented.
Financial records are the core of every due diligence process. Buyers want two to three years of tax returns, profit and loss statements, balance sheets, and bank statements. They’re looking at revenue trends, profit margins, and whether your books match your tax filings. Discrepancies between what you claim the business makes and what shows up on your returns create problems that can kill deals.
Beyond financials, buyers examine contracts and legal documents. This includes your lease, vendor agreements, customer contracts, licenses, permits, and any outstanding loans or liens. They want to know what obligations transfer with the business and whether key relationships are documented in writing.
Operational details come next. Employee information including roles, salaries, and tenure. Customer concentration data showing whether you’re too dependent on one or two clients. Vendor relationships and pricing agreements. Equipment lists and condition assessments. Anything that affects how the business actually runs day to day.
The process itself typically takes 30 to 90 days depending on business complexity. Expect multiple rounds of questions. Buyers will ask for clarification on transactions, request additional documentation, and sometimes bring in their own accountants to review your records. This back-and-forth is normal.
What makes due diligence painful for sellers is disorganized records. When buyers ask for something and you can’t produce it quickly, they get nervous. When numbers don’t reconcile or you can’t explain transactions, they assume the worst. Clean books maintained by Los Angeles QuickBooks bookkeepers throughout the year make this process dramatically easier.
Common issues that derail deals include unreported cash income, personal expenses run through the business, tax returns that don’t match your claimed profitability, and customer concentration where one client represents too much revenue. These aren’t necessarily deal-breakers, but they need to be addressed proactively.
Preparing your financials for sale should start months before you list the business. Cleaning up books, separating personal from business expenses, documenting processes, and organizing contracts. The businesses that sell smoothly are the ones where owners treated due diligence preparation as part of the exit strategy, not an afterthought.
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