What Is Due Diligence? Complete Guide for Business Buyers

Thinking of buying or selling a business? Here’s everything you need to know about due diligence and why skipping it could cost you big.

Thinking about buying a business or investing in a company? Before you sign on the dotted line, you need to perform due diligence, a critical step that can make or break the deal.

In this blog, we’ll break down:

What due diligence means in business
Why it matters
The different types of due diligence (commercial, financial, legal)
A step-by-step checklist to follow
Real-life examples and expert tips to reduce risk and increase ROI

What is Due Diligence in Business?

In business, due diligence refers to the in-depth research and analysis conducted before a major transaction, like acquiring a company or investing in securities. It’s the critical process that helps buyers evaluate risks, validate information, and make informed decisions before closing a deal.

It’s the third key step in a business acquisition, following:

Identifying a target company
Signing a Letter of Intent (LOI) and a confidentiality agreement

During due diligence, the buyer dives deep into the company's commercial, financial, and legal standing to ensure the deal aligns with their strategy and expectations.

Why Is Due Diligence Important?

Due diligence is your safety net. It:

Confirms the vendor’s claims
Identifies hidden risks
Ensures the price you're paying is justified
Reduces post-sale surprises

Think of it as "trust, but verify." It's about protecting your investment and paving the way for a smooth transition after the sale.

The 3 Types of Due Diligence (You Need All Three)

1. Commercial Due Diligence

Focuses on how the company operates, including:

Business model and revenue streams
Market trends and competitive landscape
Key customers, suppliers, and employees
Risks like customer/supplier concentration or disruption

2. Financial Due Diligence

Covers the company’s financial health, including:

Revenue trends and profit margins
Tax liabilities and working capital
Financial statements, budgets, forecasts, and bank records

You might also request a Quality of Earnings (QoE) report for a detailed analysis of past and projected performance.

3. Legal Due Diligence

Assesses:

Pending or past lawsuits
Contract obligations and lease terms
Intellectual property rights
Regulatory and licensing compliance

Learn more about our holistic approach to technical due diligence to strengthen investment decisions.

3 Key Steps to Conducting Due Diligence

Step 1: Outline the Due Diligence Process

Plan the process before diving in:

Allocate 1–3 months for due diligence—don't rush.
Use the LOI (Letter of Intent) to define access and timelines.
Identify risks early (customer concentration, market decline, etc.).
Create a roadmap to explore those risks during due diligence.

Step 2: Assemble a Due Diligence Team

Hire professionals who specialize in business acquisitions:

Accountants – to verify financial health and risks
Lawyers – to assess legal standing and contracts
IT experts – to evaluate tech assets and IP
Environmental consultants – for physical property checks

Pro tip: Involve your team early. Late involvement could delay or derail the deal.

Step 3: Conduct Thorough Due Diligence

Dig into every area of the business:

Meet key customers, suppliers, and employees
Ask tough questions
Validate vendor claims with data
Explore how risks can be mitigated
Decide whether your initial valuation still makes sense

Example: Due Diligence in a Business Acquisition

Let’s say you’re buying a business that includes a commercial building. Due diligence would involve:

Inspecting the building’s physical condition
Reviewing leases, maintenance, and insurance
Evaluating environmental issues
Validating title documents

You’ll also want to:

Assign tasks with deadlines
Review cash flow projections
Get pre-approved financing based on realistic forecasts

How Long Does Due Diligence Take?

Real estate: ~30 days
Small to mid-size businesses: 6–12 weeks
Large, complex acquisitions: Up to 6 months

Due Diligence Checklist for Buyers

Here’s what you should be reviewing:

Financial statements (3–5 years)
YTD reports and tax returns
Contracts, leases, and supplier agreements
Customer and supplier concentration
Asset lists and IP documentation
Litigation history
Employee agreements and turnover rates

If You’re the One Being Evaluated

If Someone Is Doing Due Diligence on You...

Be ready to:

Share clean, organized financial records
Address customer or employee concentration concerns
Answer questions about your strategy and operations

Tip: Work with your accountant and lawyer beforehand to anticipate what the buyer will ask.

Due Diligence for Commercial Real Estate

If your acquisition includes real estate, don’t skip property due diligence:

Physical condition of the property
Maintenance records
Environmental inspections
Legal and zoning issues

Take at least 30 days post-agreement to complete this step.

3 Tips to Maximize Your Due Diligence

Take It Seriously
Don’t ignore red flags. If sales are dropping or risks can’t be explained, it may not be the right deal.
Mitigate What You Can
If there’s high supplier concentration, research if it’s an industry-wide issue. For key employees, offer retention bonuses or contracts.
Use Findings to Negotiate
Due diligence isn’t just about backing out—it’s also your best negotiation tool. Use it to:
Justify a price adjustment
Define legal representations and warranties
Set terms for risk-sharing

Final Thoughts: Don’t Skip the Homework

Due diligence may take time, but it’s worth every hour and dollar spent. It protects your investment, prevents surprises, and sets you up for long-term success.

Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted. Albert Einstein

Need Help With Due Diligence?

Let’s connect. Whether you're buying a business or preparing for sale, we can guide you through the entire due diligence process to protect your interests and maximize value.

Not sure if a business is even worth pursuing yet? Start with our Pre-Diligence Assessment to quickly evaluate if a deal is worth deeper due diligence.

Due Diligence FAQs

What is due diligence in a business acquisition?

Due diligence is the process of thoroughly investigating a business before finalizing its purchase. It involves evaluating the company’s financials, legal matters, operations, market position, and potential risks to ensure the acquisition is a sound investment.

Why is due diligence important when buying a business?

How long does due diligence take?

What documents are required during due diligence?

Who should be involved in the due diligence process?

What are the three main types of due diligence?

Can due diligence kill a deal?

What happens after due diligence is complete?

What Is Due Diligence? A Complete Guide for Business Buyers and Sellers