Buyer's guides · After the LOI
Due diligence checklist for buying a small business
Due diligence on a small business purchase runs across six layers: the earnings, the lease, the legal record, the franchise agreement if there is one, the people, and the assets. Every check on the list has a document that settles it and a failure that ends the deal. Work them in the order that kills the worst deal cheapest, and start the checks you do not control on day one.
What this answers
- The six layers a purchase has to survive, and the document that settles each check — not a list of topics, a list of proofs.
- Which checks run on someone else's clock — landlord, franchisor, licensing board, lender — and why those go out on day one.
- What your lender is checking in parallel, including two SBA rules that change on 1 October 2026.
- What to do when a check fails: reprice, restructure, condition it, or walk — and which of those an SBA loan takes away from you.
- Where a checklist stops being useful, and what it cannot prove no matter how carefully you work it.
What due diligence is when you are buying a business
Due diligence is the period in which everything the seller has told you gets tested against documents and against people who have no reason to help the sale close. It usually begins when an LOI is signed and ends when you are committed, and what it produces is not a feeling about the business — it is a list of things that turned out to be true, a list that turned out not to be, and a list nobody could prove either way.
It is not the same job as reading the packet the broker sent. That earlier pass — which documents to ask for and what each one proves — decides whether the deal deserves a diligence period at all. This checklist is what you work once it has one, when the meter on lawyers, accountants and your own time is already running.
The structure below follows the six layers a Main Street deal actually fails in. Two of them get almost all the attention, and the deal-killers are usually in the other four: the landlord who will not assign the lease, the licence that stays with the seller, the lien nobody searched for.
The checklist
Each row is one check, the document or person that settles it, and what it means when the check fails. A check with no answer is not a pass — it moves to the list of things the documents cannot prove, and that list is the one that decides how much protection you need at closing.
1. The earnings
| Check | What settles it | What a failure means |
|---|---|---|
| The revenue actually arrived | Twelve consecutive months of bank statements, deposits tied to the profit and loss statement | Deposits running under reported revenue, with no explanation you can follow in one sentence, is the end of the conversation about price |
| The filed numbers agree with the sold numbers | Three years of business tax returns against the same three years of statements | A gap explained entirely by add-backs needs every add-back tested individually |
| Each adjustment has a document | An invoice, a payroll record or a bank line per line of the add-back schedule | An adjustment that exists only in the seller's spreadsheet is a claim about earnings, not earnings |
| The owner's job is priced in | Payroll register, plus what the owner actually does in a week | If no manager appears on payroll and the owner works full time, the SDE figure contains a salary you will pay or a job you will do |
| The earnings are not two phone calls wide | Revenue by customer, two years, names redacted if need be | Customer concentration is not automatically a no, but it changes what the business is worth and what your lender will do |
| The trend is current | Monthly figures for the current year to date, not last full year | A strong trailing year and a soft current one is the most common thing a listing leaves out |
2. The lease and the premises
| Check | What settles it | What a failure means |
|---|---|---|
| The lease can come to you at all | The signed lease, every amendment, and the landlord's written consent to assign | No consent, no location. Lease assignment is the single most common reason a sound business fails to change hands |
| The term outlasts the loan | Remaining term including options, set against the amortisation of your financing | SBA's rulebook expects the lease term, options included, to run at least as long as the loan. A shorter lease is a financing problem before it is a business problem |
| The rent is the rent you modelled | Escalation clauses, common-area reconciliations, percentage rent, the last two annual statements | Occupancy cost that steps up on renewal quietly rewrites the earnings you are buying |
| The premises may keep doing this | Certificate of occupancy, zoning, signage rules, health or fire permits for the use | A use permitted by grandfathering can die with the transfer, and the landlord is not obliged to tell you |
| Nothing is owed and nothing is in dispute | An estoppel certificate signed by the landlord | Arrears, unrepaired conditions and side agreements surface here or after closing, when they are yours |
3. The legal record
| Check | What settles it | What a failure means |
|---|---|---|
| Nothing is secured against the assets | A UCC-1 search at the state, run by you, plus payoff letters for anything found | An old equipment loan or EIDL filing still on record has to be released at or before closing, and a release takes longer than anyone expects |
| The right to operate transfers | Each licence and permit, and the issuing body's own transfer rules | Some licences do not transfer at all and must be applied for from scratch. That is a calendar problem, and the calendar belongs to a government office |
| Unpaid state tax does not follow the business | A tax clearance or bulk-sale notice under the rules of your state | New York, for one, requires notice to the tax department at least 10 days before a bulk sale. Miss it — or pay the seller before the department has replied — and the buyer can be held personally liable for the seller's unpaid sales tax, capped at the purchase price or the fair market value of the assets, whichever is higher. Other states run their own version |
| There is no litigation you are inheriting | Court records searched by entity name, trade names, and the owner's name | A claim in progress is a price adjustment or a closing condition, never a footnote |
| The contracts survive the sale | Assignment and change-of-control clauses in customer, supplier and equipment agreements | Whether contracts travel with the business depends on how the deal is structured — see asset versus stock sale — and on what each contract says |
| The seller does not reopen next door | The non-compete: scope, radius, duration, and who signs it | An agreement signed by the entity and not by the human being who holds the customer relationships protects nothing |
4. The franchise, if there is one
| Check | What settles it | What a failure means |
|---|---|---|
| The franchisor will approve you | The transfer provisions of the franchise agreement: approval, transfer fee, training requirement | The seller cannot sell you what the franchisor will not transfer, and approval is rarely quick |
| You get the disclosure document in time | The current FDD — 23 disclosure items, in your hands at least 14 calendar days before you sign or pay anything, under the FTC's Franchise Rule | Fourteen days is a floor, not a schedule. If the franchisor materially revises the agreement you are asked to sign, a fresh 7-day period runs before signing |
| You know what the brand earns and what it loses | Item 19 and Item 20 read together — see FDD Item 19 | Strong earnings claims alongside a stream of terminations and transfers describe two different businesses |
| The cost of the transfer is on your list | Current build and equipment standards, and what a transfer or renewal triggers | A required remodel is capital spending due shortly after closing, and it is almost never in the listing |
5. The people
| Check | What settles it | What a failure means |
|---|---|---|
| The business runs without the seller | Who does what, in writing: roles, hours, and who holds each customer relationship | If the owner is the business, you are buying a job and financing it at a multiple |
| The people you need will still be there | Tenure, pay against market, licences held by staff rather than by the business | One licensed technician leaving can suspend the right to trade. Ask which licence belongs to a person |
| How the workforce is classified | Payroll records and contractor agreements, read by your attorney or CPA | Classification, unpaid overtime and accrued leave are exposures that can travel with the business. This is a question to buy an hour of advice on, not to settle from a checklist |
| The seller's role afterwards is allowed | The transition plan, written down, and your lender's rules on it | SBA caps how long a seller may stay on: 24 months under SOP 50 10 8.1 for loans from 1 October 2026 — through 30 September 2026 the cap was 12 months. An informal "I'll stay a couple of years" can conflict with the loan |
6. The assets, and what they cost next
| Check | What settles it | What a failure means |
|---|---|---|
| What actually conveys | An equipment schedule with titles, serial numbers and lease or loan status per item | Leased equipment and the owner's personal truck have a way of appearing in photographs and not in the sale |
| What it will cost to keep running | Service records, ages, and the replacement cost of the two most critical items | Deferred maintenance is a price, payable by you, usually in year one |
| The inventory is real and sellable | A physical count close to closing, with obsolete and consigned stock separated | Inventory counted on paper and valued at cost is the most quietly overstated asset on a small balance sheet |
| The business keeps enough cash to trade | The working capital level left in at closing, agreed in writing | A purchase that takes every dollar out leaves a business that services debt and cannot buy stock |
| The intangibles transfer | Domain, phone number, review profiles, social accounts, software licences, customer data | Small items, and each one is a week of your life if it is missed until after closing |
The checks that are not yours
Half of this list is reading. The other half is waiting for people who do not work for you: a landlord, a franchisor, a licensing board, an insurer, and — if you are borrowing — a lender running its own checklist on the same documents. Those requests go out on day one of the diligence period, because nothing you do later makes them faster.
What a lender adds to your list, on an SBA-financed purchase:
- Coverage. The business has to produce enough cash to carry the loan after a market wage for whoever runs it. The floor for a standard 7(a) acquisition is 1.25 under SOP 50 10 8.1, which applies to loans whose SBA number is issued from 1 October 2026; through 30 September 2026 it was 1.15 under SOP 50 10 8. If a lender still quotes the older figure, ask which rulebook your file will be approved under, because the answer changes the deal. How the ratio is built, and what quietly breaks it, is in DSCR.
- An independent valuation. Where more than $250,000 of the change of ownership is being financed, SBA requires the lender to obtain an independent business valuation. It is ordered by the lender, not by you, and its figure can disagree with your price — loan proceeds may not exceed the valuation, so the gap becomes cash you find or a price you renegotiate.
- The structure itself. Standby terms on a seller note, the seller's post-closing role, and what may be paid contingently are all set by the lender's rules rather than by what you and the seller agree.
None of this is a reason to dread the lender. It is the one participant in the room whose money is also at risk, and its checklist is free to you.
What to do when a check fails
Most diligence findings are not deal-killers. They are price, structure or a condition — provided they are found while you still have the right to walk away, which is a clause in the LOI and not a mood.
- Reprice. A finding with a number attached — a lease that steps up, equipment at the end of its life, an add-back with no document — converts directly into price. A finding without a number attached converts into the next two options instead.
- Hold money back. An escrow or holdback, or a right of offset against a seller note, keeps part of the price answerable for what you were told. On small deals the offset is usually the practical version.
- Make it a condition. Landlord consent, licence transfer, franchisor approval, a lien released: each of these belongs in the purchase agreement as something that must happen before closing, not something you hope happens after.
- Walk. The cheapest outcome of a diligence period is often a decision not to buy, reached before the professional fees ran and with the deposit still yours.
One tool is missing from that list if you are borrowing from the SBA. The obvious bridge over a disputed growth story — pay part of the price later, if the growth is real — is an earnout, and SBA rules do not permit contingent seller payments in a change of ownership. A price rebate or a seller note with a right of offset is the structure your lender recognises, and it has to be arranged before the loan file is assembled.
How long it takes
There is no standard diligence period. What you have is whatever exclusivity window the LOI wrote down, and what sets the honest length of it is not your reading speed — it is the queue at the licensing office, the landlord's attorney, the franchisor's approval committee and your lender's valuation. Anyone quoting you a standard number of days is describing a custom, not a rule.
Two practical consequences. First, the window should be negotiated after you know which third parties are in it, which means asking before you sign the LOI what has to transfer. Second, the order of work matters more than the length: run the checks that can end the deal before the ones that merely adjust the price, and run the ones you do not control before either.
What a checklist cannot do
It cannot prove what nobody wrote down. A business that runs on cash, a customer relationship that lives in the seller's phone, an agreement with a supplier that was never signed — the documents are silent about all of it, and silence is not evidence of absence. The most useful output of a diligence period is often the explicit list of things the paperwork failed to prove, because that list is what your protections at closing have to cover.
It also cannot tell you whether to buy. It tells you what the documents establish, what they contradict and what they leave open — and those three lists, held next to the price, are the decision. If you want the cheap version of this before you commit to a diligence period at all, that is what a pre-screen does and a Quality of Earnings does not; when the earnings themselves are the question, what a QoE examines and what it costs is the next page.
Send the requests you do not control on day one
Landlord consent, licence transfer applications, franchisor approval, insurance quotes, and your lender's file. Each of these sits in someone else's queue, and none of them moves faster because you asked later. Everything else on the checklist can be worked while they run.
Settle the earnings before you spend on professionals
Deposits against revenue, tax returns against statements, every add-back against a document. This is arithmetic and reading, it costs nothing but your evenings, and it is the check most likely to end the deal — which is exactly why it goes before the invoices start.
Run the searches yourself
A UCC-1 search at the state, court records by entity and by owner name, and the licence register for the trade. These are public, cheap and fast, and finding a lien yourself on a Tuesday is a very different conversation from your attorney finding it in week six.
Read the lease and the franchise agreement as if you were the one bound by them
Because you will be. Remaining term against your loan, assignment mechanics, what a transfer triggers, what a renewal costs. These are the documents that decide whether a profitable business can actually change hands.
Keep one written list of what failed, what is open, and what it is worth
Dated, with the document or the person that settled each line. It becomes your renegotiation, your closing conditions and your attorney's brief — and the open items are what your holdback or offset has to cover.
Protect the right to walk until the last open item closes
Financing, landlord consent, licence transfer and any minimum earnings figure belong in the agreement as conditions. A finding discovered after you have lost the right to leave is no longer leverage; it is a loss.
Questions buyers ask
What due diligence should I do when buying a business?
Work six layers: the earnings (bank deposits against the profit and loss statement, tax returns, every add-back tested individually), the lease (assignment consent, remaining term against your loan, the real occupancy cost), the legal record (lien searches, licence transfers, state tax clearance, litigation, contract assignment), the franchise agreement if there is one, the people (who runs it, who holds the relationships, how staff are classified), and the assets (what conveys, what it will cost to keep running, inventory, working capital left in the business).
How long does due diligence take when buying a business?
As long as the exclusivity window in your letter of intent says, and no standard length exists. What sets the honest duration is the third parties: landlord consent, licence transfers, franchisor approval and — on a financed deal — the lender's valuation and credit decision. Negotiate the window after you know which of those are in your deal, and send those requests on the first day.
What is due diligence when buying a business?
It is the period after terms are agreed in which every claim about the business is tested against documents and against third parties who are not paid on the sale closing. It produces three lists: what the paperwork establishes, what it contradicts, and what it leaves open. The third list is the one that decides how much protection you need at closing.
Can I do due diligence myself, or do I need a CPA and an attorney?
The first pass is yours: comparing bank deposits to reported revenue, checking the remaining lease term against the length of your loan, running a lien search and a court search, and asking which add-backs have documents behind them. A CPA and an M&A attorney are worth paying once a deal has survived that — the lease, the purchase agreement, the workforce classification and the tax structure are where their hours pay for themselves.
What happens if due diligence finds a problem?
Usually one of four things: you reprice, you hold money back through an escrow or a right of offset against a seller note, you make the fix a condition of closing, or you walk away. Which of those is available depends on your financing — SBA rules do not permit contingent payments to a seller in a change of ownership, so an earnout is not one of your options on a 7(a) deal.
Sources
- SBA — SOP 50 10 8, Lender and Development Company Loan Programs (effective 1 June 2025)
- SBA — SOP 50 10 8.1, Appendix 15: 7(a) Changes of Ownership (effective 1 October 2026)
- SBA — Information Notice 5000-880695, Issuance of SOP 50 10 8.1 (issued 14 August 2026)
- FTC — Franchise Rule Compliance Guide (16 CFR Part 436)
- New York State Department of Taxation and Finance — Tax Bulletin TB-ST-70, Bulk Sales (NY Tax Law §1141(c))
Read next
- What documents to ask a seller for — and what each one has to prove
- What a Quality of Earnings report looks like — and what it costs
- Letter of Intent (LOI)
- Pre-screen, Quality of Earnings, or full due diligence — which does your deal need?
- how-it-works.html
Have the documents already? A DealLoupe pre-screen reads what the seller gave you and reports the red flags, the evidence gaps and the questions to ask — before you spend anything on due diligence. See what it costs →
Last updated: 2026-10-09. Educational information, not financial or legal advice — and not a substitute for a CPA, an attorney or a formal Quality-of-Earnings review.