The Ultimate Due Diligence Checklist for Small Business Acquisitions
A comprehensive checklist covering financial, legal, operational, and strategic due diligence areas every acquirer should investigate before buying a business.
Due diligence is perhaps the most critical phase of any business acquisition. It’s your opportunity to verify the seller’s claims, uncover potential risks, and ensure you’re making a sound investment. Here’s our comprehensive checklist.
Financial Due Diligence
Historical Performance
- Review 3-5 years of audited financial statements
- Analyze monthly financial statements for the last 24 months
- Examine tax returns and compare to financial statements
- Review accounts receivable aging and collection history
- Verify inventory valuation and turnover rates
Cash Flow Analysis
- Build detailed cash flow projections
- Identify seasonal patterns and cyclical trends
- Analyze working capital requirements
- Review capital expenditure history and future needs
- Understand debt service requirements
Legal Due Diligence
Corporate Structure
- Review articles of incorporation and bylaws
- Examine shareholder agreements and voting rights
- Verify good standing in all jurisdictions
- Review board meeting minutes for the last 3 years
Contracts and Agreements
- Review all material customer contracts
- Examine supplier and vendor agreements
- Analyze employment contracts and compensation plans
- Review real estate leases and property agreements
- Investigate licensing and franchise agreements
Operational Due Diligence
Management and Employees
- Assess management team capabilities and retention
- Review organizational chart and reporting structure
- Examine employee handbook and HR policies
- Analyze compensation and benefits programs
- Investigate any labor disputes or union issues
Operations and Technology
- Tour facilities and assess condition
- Review IT systems and cybersecurity measures
- Examine manufacturing processes and quality control
- Assess supply chain dependencies
- Review insurance coverage and claims history
Strategic Due Diligence
Market Analysis
- Research industry trends and growth prospects
- Analyze competitive landscape and positioning
- Examine customer concentration and relationships
- Review pricing strategy and market share
- Assess barriers to entry and competitive advantages
Growth Opportunities
- Identify potential expansion opportunities
- Analyze product development pipeline
- Examine geographic expansion possibilities
- Review acquisition integration opportunities
- Assess operational improvement potential
Red Flags to Watch For
Be particularly cautious if you discover:
- Declining revenue or profitability trends
- High customer or supplier concentration
- Pending litigation or regulatory issues
- Key person dependencies
- Outdated technology or equipment
- Poor financial controls or record keeping
Best Practices
- Hire professionals: Use experienced lawyers, accountants, and consultants
- Be thorough: Don’t rush the process or skip important areas
- Ask questions: Follow up on any inconsistencies or concerns
- Verify independently: Don’t rely solely on seller-provided information
- Document everything: Keep detailed records of your findings
Conclusion
Thorough due diligence is essential for successful business acquisitions. While it requires significant time and investment, the insights gained will either give you confidence to proceed or help you avoid a costly mistake.
Remember: it’s better to walk away from a questionable deal than to proceed with insufficient information.
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