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What Info Is Needed From A Seller For Due Diligence? How Many Days For Due Diligence?

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Comments & Replies: 10     Views: 10746     Posted By: Timothy Cunha JD  



Topics: Buying A Business, Due Diligence     Tags: buying a business, due diligence, escrow bulk sales, selling a business



The list of documents that should be requested by a buyer of the seller to do an adequate job of financial due diligence can be 10 items or 500 items depending on the type of business and size of the business.

The short list of financial items, that I ask for, to start is as follows:

- 3 most recent years P & L- plus the current year to date.
- 3 most recent year Federal Tax Returns. (Forget the state)
- 4 most recent State Quarterly Payroll Tax Returns
- Lease and all options (First few pages of lease pay have everything you need except the options.)
- Weekly staff schedule including all owners and family members regardless or not of being paid.
- List of Equipment-Leased equipment clearly labeled.

This list does not include legal issues, regulatory issues, and competition analysis.

Due diligence process only takes a two days when performed by a trained CPA and all requested information has been received. The weeks of due diligence is needed not to review the financial records but to collect information from the seller to start and to get the added information that you will request after the initial inspection of the financial records. Also the time is needed to do market studies-a subject for another discussion!

You should always ask for 2 weeks to give you time to go back and ask the seller more questions. The key to protecting yourself is that whatever the time frame agreed, it does not start until the seller has delivered all requested documents to the buyers CPA. I am currently doing due diligence on a company, where the contract allows two weeks for due diligence that begins when the seller accepts the offer. The difficulty is that after 7 days, I as the buyer’s CPA had only received two pieces of information. It appears to me that the seller is trying to stall releasing the requested information until the two weeks is over. I now have two days left for due diligence. As of today I have received no added information.

I told the buyer to rewrite the agreement for due diligence to start upon delivery of the information, but the seller will not agree to that.

Contributor: Business Broker - Lliquor Stores, Markets, Hotels, N CA

Each business is different but here is a general list: business financials, tax returns, board of equalization reporting, government and state regulation testing, all valid licenses and permits, any violations, what do clients say about the business, city planning dept. regarding future plans for the area concerned, and police dept. regarding crime. Time is usually dependent on how good the records are and the size of the business that you are planning to purchase.


A comprehensive checklist of due diligence items isn't really possible b/c every industry has its own issues that you need to dive into in order to evaluate whether or not it's a good opportunity for you. If you are literally just starting the process, what I suggest is doing a comprehensive survey on what is available on the market today in that same industry and review as many advertisements for similar business opportunities and look at the key metrics or key points of information that are contained in the ads.

Eventually, an ebb and flow of information will emerge, and you should jot down key questions that are answered in these ads, and then bring your cheat sheet with you to your first buyer/seller meeting.

I try to push for due diligence periods of a week to two weeks maximum, unless it's a very complicated transaction that is international or has a ton of moving parts, etc...Buyers should know whether it's right for them after a week or two 95% of the time. If you need more time it means there's paralysis by analysis and it may be time to move on and cut everyone's losses.


Each business is unique and may require the request of different documentation to determine the true viability of the subject business. In general you are looking for the revenues coming in and all expenses going out.

Start with revenues. Business Bank statements, federal tax returns, state sales tax returns, POS reports and purchase invoices are all ways of cross referencing income. The purchase invoices should give you a correlation between the cost of goods sold (COG) and the income those COG produced through sales. Example is if the specific industry of business you are looking at has an average of 33% COG and they purchased $100,000 of product to resale during a give period, then you can assume the sales were approximately $300,000 for that period of time. Of course the COG of each business in any given industry will fluctuate but this will give you a reference point. Use at least a 6 month period as in a shorter period of time the fluctuation of stock on hand can skew the numbers more. If the numbers are way off of what the seller states the sales are it should put up your red flag.

For expenses some of the same items will help out. Bank statements, tax returns and purchase invoices. Also utility bills, payroll reports, etc.

The lease on the premise is also a very important document to review and understand.
Timing: If all requested materials are provided, a 1 week due diligence period is more than enough to request. If you need help to review the information be prepared by having your advisors ready to review with you. Be aware that no seller wants to be tied up in a long extended due diligence period whereby he is basically off the market to other potential buyers. If you have not completed your due diligence in the time period agreed to, you can always ask for an extension. Provided that you are moving forward and doing your part, most sellers will cooperate in an extension.

Contributor: Business Broker - Preschool Specialist

Your question makes the case for getting some professional help to represent you in the transaction. Most agents and brokers who represent buyers will have the documents already in their systems for making an offer. The standard forms for business purchases have a checklist of most of the due diligence items you would want, such as; tax returns, payroll reports, inventory, profit and loss, clearance of city permits and regulations, lease terms, etc.

You should allow as much time as the seller will let you have for inspections. However, if the business for sale has multiple offers, or at least a great deal of interest from potential buyers, you will want to accommodate the seller without taking too much time for your due diligence. There are also consultants out there, some of whom even happen to promote their services here on BizBen, who can help you with due diligence. You might want to look a few of them up for a consultation.


From a legal perspective the most important documents to ask for in due diligence are typically any existing contracts and copies of the corporate records, including articles of incorporation and by laws for a corporation and the articles of organization and operating or member agreement for an LLC.

There may also be a shareholders agreement or buy/sell agreement, and minutes of corporate meetings. If the business has employment agreements or an employee handbook, those are important to review as well. And while should not solely rely on the seller's disclosures, you should ask for documents around any past, pending or threatened legal action as well as any administrative action from any government agency.

Most businesses that have been around long enough will have something in their history, whether it's a past tax audit , a lawsuit, or a health code violation. While those may not necessarily kill a deal it's important to find out about them sooner rather than later so you can investigate further if necessary.

I advise my clients to arrange for a minimum of 30 days of due diligence on anything other than a very small, simple asset purchase. Doing due diligence correctly takes a substantial amount of time, and not everything will be within your control during the process. Give yourself enough time to allow for a little breathing room if something does take longer than expected.


The diligence items you need to look at may vary depending on the type of business you are purchasing. It is wise of you to consider this early in your search so that you can add certain items and issues to your list that come to light through the search process. If you are working with a qualified business brokerage that has experience in the specific industry you are looking at, it would be advisable to have your broker prepare a diligence list for you. If your broker is not experienced or able to help you to your satisfaction then you should find someone knowledgeable or in the industry to ask specifics of.

That said, diligence should include some level of information regarding,

- Lease or Property Agreements
- Inventory of Equipment, Machinery, Furnishings, Vehicles, Primary
Supplies and separately the inventory (if any).
- Income & Expense items, These could include taxes, P & L statements, Balance sheet, Actual payment receipts, Utility Billings, Bank statements, Register tapes, Ledgers, Service records. Service Records and anything specific or unique to the business.
- Disclosures regarding anything known that may influence the business income either positively or negatively.
- You should have all equipment, mechanicals and roof, AC, plumbing, electrical and vehicles looked at by professionals if there is any question as to the condition or value of these items.

When doing diligence, I like to look at as much as the seller is willing to give. It is worth mentioning that the seller may look at this as being overly intrusive. While you do need the information it is good to be respectful of the sellers time as well.

My experience with time of doing diligence is it will take 2 to 5 weeks, depending on the particulars of the business and availability of those helping you.


The functions of due diligence is “Verify, Verify, Verify!” The time frame of the due diligence should be spelled out in the purchase contract. The two main questions I would ask is: Has the buyer been approved by the landlord and is the buyer getting a loan, if so, has he been approved by the lender.

I would also make sure the seller can produce books and records of income and expenses to warrant the sales price of the business. Get a list of the furniture, fixtures and equipment and also an allocation of the sales price.

Contributor: Business Appraisals, Valuations Advisor

The first documents you will need are the financial statements but you may have to sign a confidentiality agreement before a seller will give you these documents. You should ask for at least the last two year end financial statements plus the most current statement (Balance Sheet and P & L). If you go forward on the purchase you need to look at the last two years of tax returns either before or when you start the due diligence.

I have sat through 23 years of due diligence's and it can take a few hours or a few days, usually no longer. It is a good idea to have an accountant go to the business with you and do the job for you. He will know exactly which documents will show if the financial statements are correct and if he finds some inconsistencies he will know how to search out the answers. Don’t forget to check the inventory, purchases ordered but not received and accounts receivables for collect ability. You can ask the seller to have these and other information prepared before hand to speed up the process. The larger and more complicated the business the more time will be needed to search additional areas.


Due diligence is usually finished in about 2 weeks. If you are going into a business for the first time, then buyer should ask for about 4 weeks. Buyer should ask the seller to provide tax returns and sales tax report for last 3 years. Purchase invoice for the past year should be helpful as well.

For cash related business, I also recommend doing physical observation for at least 2 weeks. I also recommend going to the city (and dept of ABC if they serve alcohol) to find out if the business license is current and the seller doesn't have any pending violations or operating conditions.


  Helpful Resources To Assist In Selling And Buying California Businesses

Helen Yoo: Escrow & Bulk Sale Services - Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Mark Chatow, Esq.: Legal Services For Buying, Selling Businesses

Mark has a broad range of small business purchase & sale experience from analyzing potential acquisition targets to successfully guiding buyers and sellers through the purchase & sale of small businesses. Mark can assist with contracts, negotiations, legal matters, etc. Reach Mark at 949-478-8393.

Janet Carrera - Escrow & Bulk Sale Services - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

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Elizabeth McGovern: Escrow Services - SF Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Diane Boudreau-Tschetter: Escrow And Bulk Sale Services

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 800-864-0420.


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