Due diligence for buying or selling a business.
Buy-side and sell-side financial due diligence that tests the earnings, cash, working capital and debt behind a deal, so there are fewer surprises after closing.
A structured look before you commit.
Financial due diligence is the review a buyer, investor or lender performs before a transaction to understand what they are actually getting. It usually centers on a quality of earnings report and extends to cash, working capital, debt and the risks behind the numbers.
Sellers use sell-side due diligence to find and address those same questions before a buyer does.
What our due diligence covers
- Quality of earnings and adjusted EBITDA
- Proof of cash: revenue tied to bank deposits
- Working capital needs and a target peg
- Debt and debt-like items
- Customer and vendor concentration
- Items to raise with your attorney and CPA
Buy-side due diligence
Test the target's earnings, cash and working capital before you close, and flag items worth raising in negotiation or with your lender.
Buy-side QoESell-side due diligence
Prepare your records and numbers before going to market so questions surface early, while there's time to address them.
Sell-side QoEDue diligence checklist for buying a business
The financial items buyers and lenders commonly request. Use it as a starting point; every deal is different, and legal items should be reviewed with your attorney.
Financial statements
- 3 years of annual P&Ls and balance sheets, plus year-to-date and trailing twelve months
- Monthly P&Ls to see seasonality and trends
- Business tax returns for the same years, reconciled to the P&Ls
- General ledger and chart of accounts
Revenue & customers
- Revenue by customer, product and location
- Top customer concentration and contract terms
- Accounts receivable aging and bad-debt history
- Backlog, pipeline and recurring revenue support
Expenses & payroll
- Payroll registers, headcount and owner/family compensation
- Documentation for every proposed add-back
- Vendor concentration and key supplier terms
- Rent, leases and related-party expenses
Balance sheet & cash
- Bank statements to tie revenue to deposits (proof of cash)
- Inventory counts, costing and obsolescence
- Accounts payable aging and accrued liabilities
- Debt, equipment loans, leases and other debt-like items
Operations & legal (with your attorney)
- Customer, vendor, lease and franchise agreements, including assignment clauses
- Licenses, permits and insurance
- Pending or past litigation and compliance issues
- Employee agreements, benefits and contractor classification
Want help working through it?
We turn this list into a tailored request for your deal, then test what comes back.
Due diligence questions
How long does due diligence take when buying a business?
For small and lower-middle-market deals, the financial portion often takes 3 weeks to 60 days, depending on scope and how quickly the seller provides information. Your purchase agreement's due diligence period should allow for it.
What is the difference between due diligence and a quality of earnings report?
A quality of earnings report is usually the core of financial due diligence. Due diligence is broader and can also include proof of cash, working capital, debt review and coordination with legal and tax advisors.
Is financial due diligence an audit?
No. Due diligence is a transaction-focused analysis. It is not an audit, review or other attest engagement, and OTBC is not a CPA firm.