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Diligence, item by item

Diligence is the period between the letter of intent and closing when the buyer verifies what the seller has said. It runs alongside the lender's process and the closing paperwork, and it is the last point at which walking away costs only time.

The list below is organised the way the buyer track covers it. Each item says what to ask for and why, and who on the buyer's side usually does the checking. Set the conditions under which you would walk before you start, and write them down.

Signed-in buyers can track each item for one business from its listing: requested, received, cleared or flagged, who is on it, and what came back.

7.1Who you hire, and when

The people on your side. Hire them before the letter of intent is signed, not after, and tell each one what the others are doing.

  1. An accountant who has done small-business purchases

    Ask: Whether they have worked a purchase this size, and what they would look at first.

    Why: A general bookkeeper will check the arithmetic. You need someone who knows where sellers put things.

    Who: You

  2. An attorney who has closed asset sales

    Ask: Whether they have papered a purchase agreement in this state, and how they charge.

    Why: The purchase agreement, the lease assignment and the seller note all need someone who has seen them go wrong.

    Who: You

  3. The lender, early

    Ask: What the bank needs from you and from the seller, and when.

    Why: The lender's list runs in parallel with yours, and a gap on their side stops the closing.

    Who: You

  4. An insurance broker

    Ask: What the business carries today and what you will be required to carry.

    Why: Coverage gaps surface at closing, and the bank will not fund without them closed.

    Who: You

7.2Checking the money

The numbers the price was built on, verified against records the seller did not prepare for the sale.

  1. Bank statements against the profit and loss, month by month

    Ask: Twelve to thirty-six months of bank statements, all accounts.

    Why: Revenue that appears on the statements and not in the bank is not revenue.

    Who: Accountant

  2. Tax returns reconciled to the statements

    Ask: Three years of business returns, and a reconciliation of the differences.

    Why: The return is what the lender believes. A gap nobody can explain will stop the loan.

    Who: Accountant

  3. Every add-back, documented

    Ask: A receipt, a payroll record or a contract for each item on the add-back schedule.

    Why: An add-back without a document is not earnings, and the price was built on earnings.

    Who: Accountant

  4. Accounts receivable and payable, aged

    Ask: An aging report as of the most recent month, and again at closing.

    Why: It shows what is overdue, who pays slowly and what you will inherit on the day.

    Who: Accountant

  5. Seasonality and the trend

    Ask: Monthly figures for three years, side by side.

    Why: A strong annual figure can hide a weak second half.

    Who: Accountant

7.3Quality of earnings

A deeper look than the books, by someone independent of both sides.

  1. Whether a quality of earnings review is required

    Ask: The lender, whether the deal size or structure requires one.

    Why: Some lenders require it above a threshold, and the timeline needs to allow for it.

    Who: Lender

  2. Scope and cost of the review

    Ask: A written scope and a fixed fee from the provider.

    Why: A review can be a week or a month, and the difference is the scope.

    Who: You

  3. Recurring versus one-time revenue

    Ask: A breakdown of revenue by customer type and by contract versus job-by-job.

    Why: Recurring revenue is what a buyer is paying a multiple for. One-time revenue is not.

    Who: Accountant

7.4Licenses, permits and bonding

Everything the business needs permission to do, and whether that permission moves with it.

  1. Every license and permit the business operates under

    Ask: A list, with the holder's name, the issuing body and the expiry.

    Why: A license in the owner's personal name does not transfer. You would have to earn it.

    Who: Attorney

  2. What transfers, and what has to be reapplied for

    Ask: The issuing body's transfer rules for each one.

    Why: Some transfers take longer than the closing timeline allows.

    Who: Attorney

  3. Bonding and its conditions

    Ask: Current bonds, the surety, and what a change of ownership does to them.

    Why: Bonded work stops if the bond lapses at closing.

    Who: Insurance broker

  4. Open violations, inspections and compliance history

    Ask: Any notices, citations or inspection reports in the last three years.

    Why: An open violation follows the business, and its cost is yours after closing.

    Who: Attorney

7.5The people

The staff hold the customer relationships. This is the part of diligence most often skipped and most often regretted.

  1. Roster with role, tenure, pay and classification

    Ask: A list without names if the seller prefers, with start dates and how each person is paid.

    Why: It tells you who holds the place together, what they cost and whether anyone is misclassified.

    Who: Accountant

  2. Payroll records against the roster

    Ask: Payroll reports for the last year.

    Why: Overtime, bonuses and off-the-books arrangements show up here, not on the roster.

    Who: Accountant

  3. Contractors who might be employees

    Ask: Every contractor agreement, and what each person actually does.

    Why: A crew of contractors who are really employees is a liability you would inherit.

    Who: Attorney

  4. Employment agreements, non-competes and key-person risk

    Ask: Any written agreements, and a candid word on who might leave.

    Why: The person who quotes the work or holds the accounts is the business. Know before closing.

    Who: You

  5. Benefits, accrued leave and anything owed

    Ask: Benefit plans, accrued vacation and any promises made.

    Why: Accrued obligations transfer with the people, whether or not they are on the balance sheet.

    Who: Accountant

7.6Leases, equipment and the building

Where the business lives and what it works with.

  1. The lease, and the landlord's position on assignment

    Ask: The full lease with amendments, and a conversation with the landlord.

    Why: A landlord who will not assign, or will only assign on worse terms, changes the deal.

    Who: Attorney

  2. Equipment and vehicle list with age, condition and title

    Ask: The list, maintenance records, and proof the business owns what it uses.

    Why: Equipment on a personal title or under a lease is not part of what you are buying.

    Who: You

  3. Liens and financing on equipment

    Ask: A search for liens against the business's assets.

    Why: A lender's lien on the trucks survives the sale unless it is paid off at closing.

    Who: Attorney

  4. Condition of the premises and any deferred maintenance

    Ask: A walk-through with someone who knows buildings, and any inspection reports.

    Why: The roof, the HVAC and the parking lot are costs a listing does not mention.

    Who: You

  5. If the building comes with it

    Ask: An appraisal, an environmental report and the title.

    Why: Real estate has its own diligence and its own loan, and both take time.

    Who: Lender

7.7Customers

Whether the revenue stays when the owner goes.

  1. Revenue by customer, three years

    Ask: A list by share of revenue, without names if needed.

    Why: Concentration is the single biggest risk to the earnings you are paying for.

    Who: Accountant

  2. Contracts and their change-of-control terms

    Ask: Every customer contract, and whether it survives a change of owner.

    Why: A contract that terminates on sale is not recurring revenue.

    Who: Attorney

  3. Customer relationships and who holds them

    Ask: For each large customer, who they call and how long that person has been there.

    Why: If the owner holds the relationship, the customer is leaving with them unless you plan for it.

    Who: You

  4. Reviews, complaints and reputation

    Ask: Public reviews, complaints history and how they were handled.

    Why: Reputation inside a few zip codes is most of what you are buying.

    Who: You

  5. Conversations with customers, if the seller allows

    Ask: Introductions to two or three customers under an agreed script.

    Why: Nothing verifies a customer list like the customers.

    Who: You

7.8What the business carries

Liabilities, insurance and the things that follow a business to its next owner.

  1. Insurance policies and the claims history

    Ask: Every policy in force, the declarations pages and five years of claims.

    Why: The claims history says how the place is run, and the policies say what you will need to carry.

    Who: Insurance broker

  2. Workers' compensation history and rating

    Ask: The experience modifier and any open claims.

    Why: A poor rating raises the cost of every payroll dollar for years.

    Who: Insurance broker

  3. Litigation, judgments and disputes

    Ask: Anything pending, threatened or settled in the last five years.

    Why: In an asset sale most of it stays with the seller; the reputation does not.

    Who: Attorney

  4. Warranties, guarantees and open obligations to customers

    Ask: What the business has promised customers that is still outstanding.

    Why: Work under warranty is cost you inherit without revenue.

    Who: You

  5. Debts, taxes and anything secured against the assets

    Ask: Loan statements, tax filings and a lien search.

    Why: An unpaid tax bill can attach to the assets you are buying.

    Who: Attorney

7.9Walking away

The conditions under which you stop, set before you start.

  1. Your written conditions, agreed with your advisors

    Ask: Yourself, before diligence begins: what finding would end this?

    Why: Decided in advance, walking away is a decision. Decided under pressure, it is an argument.

    Who: You

  2. What a finding is worth, and what it is not

    Ask: Your accountant and attorney, whether a finding changes the price, the structure or the decision.

    Why: A real finding justifies a conversation. A tactic does not, and sellers can tell the difference.

    Who: You

  3. The deposit and the exclusivity clock

    Ask: When the deposit goes hard and when exclusivity ends.

    Why: The cost of walking away changes on those dates.

    Who: Attorney

  4. How you would tell the seller

    Ask: Yourself, how to end it straight.

    Why: This is a small world, and the next business you look at may know this seller.

    Who: You

The pieces that explain each area are on the buyer track under Diligence; the ones not yet published are marked coming on the guides page. The documents each item asks for are listed on the quick reference.