Question 1

What is due diligence when buying a business?

Accepted Answer

Due diligence is the comprehensive investigation a buyer conducts before completing a business acquisition. It covers financial records, legal matters, operations, customers, employees, real estate, environmental compliance, and technology. The goal is to verify the seller's claims, identify risks, and confirm the business is worth the purchase price.

Question 2

How long does due diligence take?

Accepted Answer

Due diligence typically takes 60-90 days for small business acquisitions. Complex deals or those requiring environmental assessments may take longer. The timeline is usually specified in the Letter of Intent (LOI) and can be extended by mutual agreement.

Question 3

What is a Quality of Earnings (QoE) report?

Accepted Answer

A Quality of Earnings report is a financial analysis performed by an independent accounting firm that verifies the business's true earning power. It adjusts reported earnings for non-recurring items, accounting irregularities, and owner add-backs. QoE reports typically cost $15,000-$40,000 and are considered essential for acquisitions over $500K.

Question 4

What are the most common due diligence red flags?

Accepted Answer

Common red flags include customer concentration over 20% in a single client, declining revenue trends, pending or threatened litigation, unfavorable lease terms, key employee flight risk, undisclosed liabilities, environmental contamination, and significant discrepancies between tax returns and financial statements.

Due Diligence Checklist

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