The Business Sales Due Diligence Process: 5 Essential Steps for a Smooth Transaction

By Sudarsan Pattabiraman (Broker / M&A Advisor) | 510.944.5616 | sudarsan@upclinch.com

 The Business Sales Due Diligence Process: 5 Essential Steps for a Smooth Transaction

When selling a small or lower middle-market business, one of the most critical phases is due diligence. This is where the buyer peels back the layers to verify that what they’ve been told aligns with reality—financially, operationally, legally, and commercially. While this phase can feel invasive and time-consuming, it’s a vital step that, when approached correctly, builds trust and increases the likelihood of a successful closing. Below is a simplified breakdown of the due diligence process into five key steps, designed to give business owners a clear roadmap of what to expect and how to prepare.

1. Preparation and Pre-Diligence Cleanup
Before the buyer dives in, the seller needs to prepare. This step involves organizing and reviewing essential materials in advance. Preparatory efforts may include:

• Reviewing and cleaning up financial statements, tax returns, and payroll records

• Resolving open compliance issues or licensing gaps

• Identifying and documenting owner-related or non-recurring expenses

• Ensuring contracts, permits, and insurance policies are current and accessible

2. Buyer Request List and Document Sharing
After a signed Letter of Intent (LOI), the buyer will issue a formal due diligence checklist. The request list typically covers multiple areas, and responses may include:

• Financial documents such as income statements, balance sheets, and tax filings

• Legal records including corporate formation documents and pending litigation history

• HR details like employee roles, wage summaries, and benefit plans

• Operational and commercial information such as supplier agreements and customer contracts

3. Financial Verification and Normalization
The buyer will examine historical performance to verify reported earnings and adjust for anomalies. Areas of focus often include:

• Reviewing three to five years of financial statements and general ledger entries

• Verifying key ratios such as gross margin and customer concentration

• Reconciling Seller’s Discretionary Earnings (SDE) with supporting documentation

• Evaluating the sustainability of revenue trends and identifying seasonality

4. Operational and Legal Review
Beyond numbers, buyers want to understand how the business functions day to day and what risks might exist. Supporting materials may include:

• Copies of lease agreements, equipment titles, and vendor contracts

• Employee lists with roles, tenure, and compensation structure

• Intellectual property registrations, trademarks, or proprietary process documentation

• Disclosure of legal disputes, regulatory notices, or compliance lapses

5. Final Review and Closing Preparation
Once major concerns are addressed, both parties begin preparing for closing. Activities at this stage typically involve:

• Answering final buyer questions or clarifying open diligence items

• Reviewing and negotiating the purchase agreement and related legal documents

• Coordinating with escrow agents, lenders, or legal counsel for funding and filings

• Creating a transition roadmap for training, handoffs, and employee announcements

Final Thoughts
Due diligence isn’t just a checkbox—it’s a two-way trust-building process that protects both parties. Sellers who are transparent, responsive, and organized give buyers the confidence to move forward, often strengthening the final deal structure or valuation. If you're planning to sell your business, start preparing early. A well-run due diligence process can be the difference between a deal that drags and one that closes with clarity and confidence.

Need help preparing your business for a successful exit? Reach out to Sudarsan Pattabiraman for experienced guidance and M&A support tailored to lower middle-market business owners.

Contact Sudarsan for planning and executing your perfect exit / strategic acquisition. Schedule time to unlock the business value and realize it for the benefit of you, your family and your community. Email:sudarsan@upclinch.com   Phone: 510.944.5616