The Complete
Due Diligence Checklist

3 years of federal and state tax returns

Compare to provided P&L — any discrepancy is a red flag. Tax returns don't lie (people don't overpay the IRS).

Monthly P&L statements (last 24 months)

Look for seasonal patterns, revenue trends, and margin consistency. One annual P&L hides too much.

Reconstruct SDE / owner benefit

Add back: owner salary, health insurance, personal vehicle, one-time expenses, non-recurring legal/consulting fees. Verify each add-back with documentation.

Accounts receivable aging report

What percentage is 60+ days past due? Who owes it? Will it transfer? AR over 90 days should be discounted or excluded from working capital.

Accounts payable and debt schedule

All outstanding obligations: vendor payables, equipment loans, lines of credit, leases. Understand what transfers with the sale.

Working capital analysis

Calculate average monthly working capital needs. Seasonal businesses (HVAC, landscaping) may need $200K+ in reserves for off-peak months.

Revenue by customer (top 20 list)

No single customer should exceed 10-15% of revenue. If they do, that's a concentration risk — and a negotiation point.

Complete employee roster with roles, tenure, and compensation

Who stays? Who's critical? Any employees with undocumented arrangements (cash payments, verbal promises, family members)?

Key-man risk assessment

Who holds the customer relationships? Who has the technical skills? If one person leaving would break the business, that's key-man risk.

Standard operating procedures (SOPs)

Are processes documented? If it's all in the owner's head, expect a 6-12 month transition period (and negotiate accordingly).

Equipment and vehicle condition report

Age, mileage, maintenance history, remaining useful life. Deferred maintenance = hidden CapEx you'll need to fund post-close.

Technology systems and software

CRM, scheduling, accounting, dispatch — what's in use? Are licenses transferable? Many service businesses still run on paper and spreadsheets.

Vendor and supplier contracts

Are pricing terms locked in? Can contracts be assigned to a new owner? Any exclusivity agreements that restrict operations?

Business licenses and permits

Verify all required licenses are current. Check transferability — many require new applications, exams, or waiting periods for new owners.

Insurance policies (GL, WC, E&O, commercial auto)

Review coverage levels, claims history (3 years), and annual premiums. High claims history = higher post-acquisition premiums.

Pending or threatened litigation

Any lawsuits, complaints, or regulatory actions. Ask for a litigation representation in the purchase agreement.

Lease terms and assignment clauses

When does the lease expire? Can it be assigned or extended? Is there a personal guarantee? Landlord approval is often required for transfer.

Non-compete and employment agreements

Does the seller have a non-compete? Do key employees? You need the seller locked into a 2-3 year non-compete within a reasonable geographic radius.

Environmental and regulatory compliance

Especially important for HVAC (refrigerant handling), pest control (chemical storage), and auto repair (waste disposal). Non-compliance = inherited liability.

Customer concentration analysis

Request the top 20 customer list by revenue. Calculate what percentage the top 5 represent. Interview 3-5 key customers to gauge loyalty and relationship with the owner.

Competitive landscape

Who are the top 5 competitors? What's the competitive moat — price, service quality, brand, geographic lock-in? Is a PE roll-up operating in the market?

Online reviews and reputation

Check Google, Yelp, BBB, and industry sites. A 4.5+ star rating with 100+ reviews is gold. Below 3.5 stars or unresolved complaints = brand risk.

Local market trends

Population growth, housing starts, commercial development, median home values. A growing market lifts all boats — a shrinking one makes everything harder.