Diligence is not an audit and it is not a formality. It is the process of testing whether the business described in the listing is the business you will actually own on the first Monday after closing. Most of what goes wrong in a small acquisition was visible beforehand to someone who knew where to look.
In short
- Verify earnings against bank deposits and tax returns before spending money on anything else.
- Customer concentration, owner dependence and un-assignable contracts cause more failed deals than fraud.
- Write down what would make you walk away before you start, while you are still capable of walking away.
Start with the money, in this order
The cheapest test comes first: do the bank statements support the revenue? Twelve months of deposits should reconcile to reported sales, allowing for timing and financing. If they do not, everything downstream is unreliable and you have spent almost nothing finding out.
Then reconcile tax returns to the financial statements to the adjusted earnings figure. Ask the seller to walk you from the tax return to their headline number, one adjustment at a time. What you are testing is not honesty so much as whether the business is understood by the person selling it.
- Twelve months of bank statements against reported revenue
- Three years of tax returns against financial statements
- A written bridge from tax return to adjusted earnings, with each add-back supported
- Accounts receivable aging — old receivables are often revenue that will never arrive
- Working capital through a full year, including the low point
Find out how much of this depends on one person
The most expensive discovery in a small acquisition is that the business was the owner. Ask directly how many hours they work and what they do in them, then test it against the organization chart and the payroll.
The practical question is what happens in the first ninety days. Who do customers call? Who quotes work? Who knows why the fourth-largest account gets a discount? If the honest answer to most of these is the seller, you are buying a job, and you should price it as one.
Customers, and the concentration nobody volunteers
Ask for revenue by customer for three years, not one. A single year hides the trend that matters: whether the largest account is growing, shrinking, or was won last spring and has not yet been tested.
Contracts matter less than people expect and assignability matters more. A three-year agreement that terminates on change of control is not protection, it is a countdown.
| What you find | The real question | Typical consequence |
|---|---|---|
| One customer above 25% of revenue | Does this survive the sale? | Price adjustment, or part of the payment tied to that account staying |
| Contracts terminable on change of control | Do I actually acquire the revenue? | Consent sought before closing, or the revenue is discounted |
| Revenue concentrated in the owner's relationships | Will these transfer? | Longer handover, earn-out, or a lower multiple |
| Recurring revenue on written agreements | How much of this repeats? | Supports a higher multiple where it is genuinely contracted |
The unglamorous items that stop closings
Deals rarely collapse over the income statement. They collapse over a lease the landlord will not assign, a license held in the owner's name, an unrecorded liability, or an employee agreement nobody can find.
Work through these early, because each one takes third-party time you do not control. A landlord takes weeks. A licensing authority can take months.
- Lease: remaining term, assignment clause, landlord consent, personal guarantees
- Licenses and permits: held by the company or by the owner personally
- Employees: agreements, classification, accrued leave, any unwritten promises
- Equipment: ownership versus lease, condition, deferred maintenance
- Litigation, liens, tax standing, and insurance claims history
Decide your walk-away before you are invested
By week six you will have spent money and told people you are buying a business, and both make it harder to stop. Write down at the start what would end it: a revenue miss beyond a set percentage, the loss of the largest customer, an unassignable lease, an owner who will not commit to a handover.
The point is not to be rigid. It is that a decision made now, calmly, is worth more than the same decision made later while trying to justify what you have already spent.
Common questions
- How long does diligence on a small business take?
- Thirty to ninety days is typical once an offer is accepted, with the range driven mostly by how prepared the seller is rather than by the size of the business. An owner who can produce documents the same week compresses it dramatically; one who takes ten days per request will stretch it past ninety and lose buyer confidence along the way.
- What should I check first if my budget is limited?
- Bank statements against reported revenue. It is the cheapest test, it can usually be done in a day, and if it fails nothing else matters. After that, customer concentration and the lease, because both can end a deal independently of price.
- Do I need an accountant and a lawyer?
- For anything beyond the smallest purchase, yes, and used differently. An accountant tests whether the earnings are real, which is a question about the past. A lawyer handles what transfers and on what terms, which is a question about the future. Buyers who economise here usually pay the difference later, and with less choice about when.
- Can I talk to employees and customers?
- Usually not until very late, and never without the seller's agreement. Most owners have not told their staff, and a leak can damage the business you are trying to buy. Customer calls are commonly permitted just before closing, on a short list the seller approves.
This is general information, not investment, legal, tax or valuation advice. Every business and every transaction differs; take professional advice on your own circumstances before acting.