What happens during due diligence when you sell?

Due diligence is the period after a buyer makes an offer when they dig into everything you’ve told them. It’s the stage where most deals that fall apart actually fall apart, not at the negotiating table, but in the details. Knowing what buyers look for, and being prepared for what they’ll find, is the difference between a smooth close and a deal that collapses after months of work.

What triggers due diligence

Due diligence starts after both parties sign a Letter of Intent (LOI), the document that lays out the agreed price, structure, and main terms of the deal. The LOI is typically non-binding on the final deal (either party can still walk away), but it usually includes an exclusivity period, typically 30 to 90 days, during which the seller agrees not to talk to other buyers.

During the exclusivity window, the buyer has your full attention and you have no other options. This is why getting the LOI terms right, including the length of exclusivity and the conditions under which either party can walk, matters. Have your attorney review the LOI before you sign it.

What buyers actually look at

Due diligence covers financial, legal, operational, and personnel areas. Here’s what each involves:

Financial due diligence

The buyer’s accountant (or a third-party firm they hire) performs a Quality of Earnings (QoE) analysis. They independently verify:

• Three years of tax returns and financial statements
• Bank statements matched to the P&L
• The earnings recast, each add-back the seller presented, verified with documentation
• Revenue recognition: are sales recorded when cash is received or when work is performed?
• Major customers and their revenue contribution over time
• Accounts receivable quality (how much is overdue, what’s the write-off history)
• Any related-party transactions (business deals between the company and entities owned by the seller or their family)

If the QoE finds that the verified earnings are lower than what was presented, even by $50,000, the buyer will reduce their offer by the full multiple applied to that difference. A $50,000 earnings reduction at a 5x multiple is $250,000 off the price.

Legal due diligence

The buyer’s attorney reviews:

• All customer contracts, are they written, are they transferable, what are the termination clauses?
• Vendor and supplier agreements
• Employee agreements, especially with key people
• Any non-compete agreements with former employees or partners
• Outstanding litigation or claims, anything pending or threatened
• Regulatory compliance history
• Ownership documentation (operating agreement, stock certificates, cap table)

A customer verbal agreement that generates 25% of your revenue is not a contract. A buyer sees that as risk. They may require the customer to sign a contract before closing, or they’ll adjust the price.

Operational due diligence

For trades businesses, this often includes:

• A review of your equipment, vehicles, and their condition
• Licensing and permit status, and whether they transfer to a new owner
• Insurance policies and claims history
• Safety records (OSHA, workers’ comp history)
• Technology systems and software
• Key vendors and supplier relationships

License transferability is a common surprise in trades deals. In some states or municipalities, contractor licenses are personal, they belong to the individual, not the company. A buyer who plans to rely on those licenses needs to have the right licensed individuals in place before or at closing. Failing to address this can stall or kill a deal.

Personnel due diligence

The buyer wants to understand:

• Who the key employees are and whether they’re likely to stay
• Compensation structures, benefits, and any verbal promises made
• Any labor disputes, discrimination claims, or HR issues
• Ownership of the sales and customer relationship function (is it the owner or someone else?)

At this stage, confidentiality is critical. Most buyers want to meet key employees before closing, but this needs to be managed carefully so employees don’t feel blindsided or start job hunting.

How deals fall apart in due diligence

Based on what active brokers and advisors see most often:

Quality of earnings adjustments. The recast financials presented to the buyer don’t hold up under scrutiny. Add-backs that seemed reasonable on paper turn out to be difficult to document. Revenue that looked recurring turns out to be one-time.

Undisclosed tax issues. Back taxes, payroll tax liabilities, or unfiled returns discovered during due diligence are deal-killers. The buyer doesn’t want to inherit a tax problem, and the liability throws off the deal economics.

Customer concentration discovered late. The buyer finds that one customer represents 35% of revenue, information that changes the risk profile significantly from what was communicated during the offer stage.

License or permit complications. A key license turns out to be personal, or a key permit has lapsed.

Seller hesitation. Some sellers slow down document production during due diligence, consciously or not, because the emotional reality of the sale is setting in. Buyers notice delays. They start to wonder if there’s a reason the seller is dragging their feet.

How to prepare before due diligence starts

The best way to survive due diligence is to do your own due diligence on yourself before going to market. This is called sell-side due diligence or a seller’s quality of earnings.

You hire an accountant, one who works with business sales, to do the same review the buyer’s accountant will do. This surfaces problems while you still have time to fix or disclose them, rather than having them discovered by a skeptical buyer.

The cost is typically $5,000 to $15,000. The value is: no surprises, a defensible recast, and a faster, cleaner due diligence period once you have a real buyer.

Organize your data room in advance. Have three years of tax returns, financial statements, key contracts, equipment records, and licenses ready and organized before the first buyer meeting. Sellers who scramble during due diligence signal disorganization that makes buyers nervous.

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Common questions owners ask

How long does due diligence take?

For a small business sale under $2 million, due diligence typically takes 30 to 60 days. Larger deals ($2–10 million) commonly run 60 to 90 days. Complex situations, multiple entities, real estate, outstanding legal matters, or a buyer who is slow to respond, can extend beyond 90 days. The clock typically starts when both parties sign a letter of intent and the buyer receives access to your financial records and documents.

Can the buyer lower their offer after due diligence starts?

Yes, and it happens more often than sellers expect. If the buyer's accountant finds that the earnings don't support the recast financials presented during the offer stage, or if undisclosed issues come up, the buyer will typically either renegotiate the price or restructure the deal (adding earnouts or holdbacks). This is called a 'retrade.' The best defense is to have your own accountant prepare the financials honestly before going to market, so there are no surprises.

What is a 'data room' and do I need one?

A data room is a secure online folder (using tools like Dropbox, Google Drive, or a dedicated platform like Intralinks) where you organize and share documents with the buyer during due diligence. You don't need fancy software, a well-organized shared folder works fine for most small deals. What matters is having the documents ready before due diligence starts, not scrambling to find them once a buyer is waiting.

Should I disclose problems with the business before due diligence?

Yes. Disclosure before due diligence, or at least before signing a purchase agreement, gives you legal protection and preserves trust. If a buyer discovers a material problem you knew about and didn't disclose, it can kill the deal, expose you to legal liability, or create claims against you after closing. Most sellers who have been through the process recommend being straightforward about known issues early, framing them with context and, where possible, documentation showing the issue is contained or resolved.