Buying a Business: Due Diligence Checklist
Due diligence simply means checking a business properly before you buy it. In a service business the real value sits in customers, people and processes, not in equipment, so that is where to look first.
What is due diligence, and why does it matter?
Due diligence is the homework you do between agreeing on a deal and paying for it. You confirm that what the seller told you is true. Buyers who skip it often find out, after paying, that the revenue was not as steady as it looked.
Is the revenue real and repeatable?
Two businesses with the same sales can be worth very different amounts. Ask for two to three years of sales split by customer, then match it against bank statements, GST returns and tax filings. Watch for these warning signs:
- A few customers making up most of the sales.
- One large, one-off project inflating the average.
- Customers who pay very late or often dispute bills.
Who really holds the customer relationships?
In many service businesses, customers trust a person, not a company. If the owner or one senior employee handles every key account, those customers may leave when that person does. Read the contracts: how long do they run, and can customers cancel easily?
Will the team stay, and can the work run without the owner?
Find out who does the real work, how long they have been there and how they are paid. Then ask whether the work is written down as step-by-step instructions (called SOPs). A business that runs only on the owner's memory is fragile after a handover.
What hidden risks could cost you later?
- Unpaid GST, TDS, PF or ESI dues.
- Pending court cases or customer disputes.
- Loans, guarantees or claims by lenders on the assets.
- Licences or registrations that do not transfer to a new owner.
- Lease terms: rent, renewal rights, and who owns the premises.
If property is a big part of the business, such as a clinic, hotel or warehouse, also check the ownership papers and any lease in detail.
How should the findings change your price?
Every risk you find is a reason to lower the price, change how you pay, or walk away. Payment structure matters as much as price, and our guide to deal terms explains how. Also plan what happens after closing, using the first 100 days guide, before you sign.
Quick checklist
- Sales split by customer for 2-3 years, matched to bank and GST records
- Top customers and their contracts reviewed
- Key people identified and likely to stay
- Processes written down, not only in the owner's head
- Tax, GST, PF and ESI payments up to date
- No hidden loans, guarantees or legal cases
- Licences and lease checked for transfer
- Property papers checked, if property is part of the deal
Common questions
How long does due diligence take?
For a small or medium business it usually takes a few weeks. Messy records take longer, which is itself a warning sign.
Who should do it?
You lead it. A chartered accountant checks finances and tax, a lawyer checks contracts and legal risks, and an advisor helps pull the findings into one decision.
Can I do it myself?
You can start with the checklist above. Specialists, though, catch problems that first-time buyers often miss.
Need help applying this to your situation?
Book a ConsultationThis article is general information, not legal, tax or financial advice. Please consult a qualified professional for your situation.