What is on a due diligence checklist for buying a small business?

Why does the order matter more than the list?

Most diligence checklists online have 100 or more items. They are complete, and they are in the wrong order. A buyer who works through them top to bottom pays lawyers and accountants before learning that the lease cannot be assigned.

The costs are real. A survey of deal costs, with a median deal size of about $4 million, found median legal fees of $28,500 and a median quality of earnings (QoE) cost of $40,000. Total costs came to about 2% of the price. Most of that money is spent in the middle of diligence. If a deal dies, you want it to die before that money goes out.

Time is also limited. LOI exclusivity typically runs 30 to 90 days. Wasted weeks shorten the time left for the work that matters.

Phase 1: what do you check before the LOI?

These checks cost nothing but your time. They decide whether you make an offer.

• Summary P&L for three years and the seller's earnings calculation.
• The reason for the sale and the owner's weekly role.
• Top customers' share of revenue.
• Lease term and renewal options.
• Whether the industry and deal size fit your lender. Call the lender now, not after the LOI.
• Your own eligibility: the 10% equity injection, seasoned about 30 days or documented, and the SBA citizenship rule in effect since March 1, 2026.

Phase 2: which deal-killers do you check first after the LOI?

Do these in the first one to two weeks. Each is cheap. Each can end the deal on its own.

1. Tax returns against the P&L. If reported earnings are far below the listing, the lender will use the tax return. Recalculate what the bank will lend.
2. Bank deposits against revenue. A simple proof of cash. See how to verify a seller's numbers.
3. The lease. Read the assignment clause and remaining term. Ask the landlord's position early.
4. Licenses and permits. Find out which are in the owner's personal name and whether they transfer.
5. Customer concentration. Get revenue by customer. Ask whether the largest contracts can be assigned.
6. Owner dependence. Map who does the selling, quoting and key relationships.
7. Liens and litigation. UCC, tax lien and court searches are inexpensive.
8. The lender's first read. Send the tax returns and your capital stack to the lender. Ask whether coverage clears 1.25x on historical numbers for an initial acquisition.

Phase 3: what is the expensive work, and when do you start it?

Start this once phase 2 is clean. This is where most of the 2% is spent.

• Financial. A QoE or a narrower accounting review. For SBA initial acquisitions and business expansions with a business price of $3 million or more, the lender commissions an independent QoE and uses its earnings. Below $3 million the SBA does not require one, though your lender may still ask for one. Add a working capital analysis and a review of tax filings.
• Commercial. Customer calls, near the end and with the seller's agreement. Pricing history. Contract terms.
• Operational. Equipment condition and replacement needs. Employee roster, pay and tenure. Key-person risk. Vendors and systems.
• Legal. Entity documents, material contracts, employment matters, insurance and claims, environmental issues where relevant, intellectual property. Your lawyer drafts the purchase agreement in parallel.
• Financing. The lender orders the independent business valuation. Total debt is capped at the appraised value. Any gap between price and valuation must come from your cash.

Phase 4: what do you confirm before closing?

• Landlord consent or a new lease signed.
• Required customer and vendor consents obtained.
• Licenses and permits transferred or reissued.
• No material changes since the LOI. Get updated monthly numbers.
• Seller transition agreement signed. SBA rules allow the seller to stay as a consultant or employee for up to 24 months in total.
• Insurance bound, bank accounts open, payroll ready for day one.

Worked example: what sequencing saves

Take a $2 million purchase. If the survey's 2% held at this size, total diligence and deal costs would be about $40,000.

1. Phase 2 costs mostly your time, a few CPA hours and public record searches.
2. Phase 3 holds most of the spend: legal work and a QoE, where SBA-deal QoE proposals have ranged from $7,500 to over $30,000.
3. If the lease turns out to be unassignable in week two, you lose very little.
4. If you find the same problem in week six, after the QoE and a first draft of the purchase agreement, you could lose most of the $40,000.

Where these numbers come from: Deal cost figures from the Big Deal Small Business deal cost survey; SBA QoE proposal range from Searchfunder. Diligence and exclusivity periods from BizBuySell's SBA loan timeline and Big Ideas DB on letters of intent. SBA rules (1.25x coverage, $3 million QoE threshold, valuation cap, 24-month seller transition, injection) from this SOP 50 10 8.1 guide; citizenship rule from Cantrell Firm. SOP 50 10 8.1 applies to loans that receive an SBA loan number on or after October 1, 2026 (SBA Information Notice 5000-880695).

Related questions

How long does due diligence take?

On SBA deals, typically 30 to 60 days, inside an LOI-to-close period of 60 to 120 days. Messy books, landlord delays and a required QoE push it to the long end.

Can I do due diligence myself?

You can do phase 2 yourself and should. Use a CPA for the accounting review and a transaction lawyer for the purchase agreement and legal review. The lender will do its own work on top.

What happens if diligence finds a problem?

You have three choices: walk, renegotiate price, or change the terms. Which one fits depends on whether the problem can be measured. See when to renegotiate and when to walk away.

Should I extend exclusivity if diligence runs long?

Ask early, before exclusivity expires, and give a reason tied to a specific item. A seller is more likely to agree when the delay comes from a third party such as the landlord or the lender.

What comes next

The biggest single diligence cost is usually the accounting review. The next question is whether you need a quality of earnings report. The buyers who end up with the most valuable companies decide what the business goes into before they buy it, and diligence is the moment to check whether its books can support that.

Related articles

• How do you verify that a seller's numbers are real?
• What questions should you ask when buying a business?
• How much customer concentration is too much?
• What happens after you sign a letter of intent?
• What are the SBA 7(a) rules for buying a business, as of October 2026?

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This article is general information, not legal, tax or investment advice.