7 Things Buyers Look At First During Due Diligence
- Legal Sections
- 19 Oct, 2026
You have received a letter of intent, the price looks good, and the excitement is building. Then the buyer's advisors send a due diligence request list that runs to dozens of pages. This is the moment when many deals are won or lost.
Due diligence is the buyer's chance to verify that what they were told about your business is true. Experienced buyers tend to start with the same handful of areas, because problems there can change the price or end the deal entirely. Knowing what they look at first lets you prepare, fix weak spots early and keep the process on track.
Here are the seven things buyers examine first.
1. Quality of Earnings
Buyers pay for future profit, so they begin by testing whether your reported profit is real and repeatable. A quality of earnings (QoE) review goes beyond the income statement to see what is driving the numbers.
Expect scrutiny of one-time items, owner perks run through the business, unusual expenses and any revenue that was recognized early. Buyers will also compare your monthly figures with your tax returns and bank statements. If those do not reconcile, trust drops quickly.
How to prepare: Keep clean, monthly financial statements prepared consistently. Document every add-back (such as owner salary above market rate or a one-off legal fee) with supporting evidence. An add-back you cannot prove is an add-back the buyer will remove
2. Revenue Quality and Customer Concentration
Not all revenue is equal. Buyers want to know how predictable it is, where it comes from and how likely it is to continue after the sale.
They will look at your top customers, the length of your relationships, contract terms and churn rates. If one client accounts for 30 percent of sales, a buyer sees risk: losing that client could sink the deal's economics. Recurring or contracted revenue is valued more highly than one-off projects.
How to prepare: Prepare a customer breakdown by revenue over the past three years. If concentration is high, work on diversifying before going to market, or be ready to show long-term contracts and strong relationships that reduce the risk.
3. Working Capital, Debt and Cash Flow
Buyers want to know how much cash the business needs to run day to day and what obligations come with it. Profit on paper does not help if cash is always tight.
They will review accounts receivable and payable, inventory levels, seasonal swings and all debt, including leases, loans and off-balance-sheet commitments. The purchase agreement will usually include a working capital target, and a gap between that target and what you deliver at closing can reduce your proceeds.
How to prepare: Understand your normal working capital level and how it moves through the year. Clean up old receivables, resolve disputed invoices and list every debt and obligation in one place.
4. Legal Standing, Contracts and Litigation
A buyer inherits your contracts and your legal exposure. Counsel will review corporate records, ownership documents, major customer and supplier agreements, leases, licenses and any pending or threatened litigation.
They look for change-of-control clauses that let a counterparty terminate or renegotiate when ownership changes, exclusivity terms that limit growth, and disputes that could turn into costly claims.
How to prepare: Organize your corporate minute books, cap table and signed contracts in one place. Read your key agreements for assignment and change-of-control language so that nothing surprises you or the buyer. Disclose known disputes early; surprises found late damage credibility more than the issue itself.
5. Tax Compliance
Tax problems are one of the most common sources of post-closing liability, especially in stock purchases where the buyer takes on the company's history. Buyers review several years of returns, payroll tax filings, sales and indirect tax compliance, and any audits or notices.
They also look at how workers are classified, since treating employees as contractors can create significant back-tax exposure. If the business operates across states or countries, they will check whether the right filings were made everywhere.
How to prepare: Confirm all filings are current and consistent with your financial statements. If you find gaps, work with a tax advisor to fix them before the process starts, rather than having a buyer find them.
6. People: Management Team and Employees
Businesses run on people, and buyers know it. They want to understand who the key employees are, whether they will stay and how dependent the company is on you, the owner.
Diligence covers organization charts, compensation, employment agreements, non-competes, benefit plans, turnover and any labor issues or claims. A company that cannot operate without its founder is worth less than one with a capable second tier of leaders.
How to prepare: Build and document a management team that can run day-to-day operations. Consider retention arrangements for critical employees, and make sure key roles are covered by written agreements.
7. Intellectual Property, Technology and Cybersecurity
If your value lies in brands, software, patents, data or proprietary processes, buyers need proof that you actually own them. They will check trademark and patent registrations, and whether employees and contractors signed agreements assigning their work to the company.
For technology and data, expect questions about software licenses, open-source use, system architecture, data privacy compliance and security practices. A past breach or weak controls can become a negotiating point or a deal-breaker.
How to prepare: Make a list of all IP the company owns and confirm ownership is documented. Review your security practices and fix obvious gaps before a buyer's technical team finds them.
Bringing It Together
The common thread across all seven areas is credibility. Buyers are not expecting a perfect business, because none exists. They are looking for a business that is honestly presented, well documented and free of nasty surprises. Issues that are disclosed and explained can usually be priced or managed. Issues that are hidden and discovered later erode trust and often lead to lower offers, tougher terms or a lost deal.
The best preparation is to run your own due diligence first. Many owners hire advisors to conduct a sell-side review 12 to 24 months before going to market. It gives you time to fix problems, strengthen your numbers and build a data room that answers questions before they are asked.
A smooth diligence process shortens timelines, protects your valuation and gives buyers the confidence to close. Treat it not as an audit to survive, but as the final stage of presenting your business at its best.
Thinking about selling? Start preparing early. The work you do before a buyer arrives is the work that pays off most at the closing table.