Due diligence is where deals either get stronger or start to fall apart. I have seen buyers walk away entirely because of what surfaced during this process, and I have seen sellers get a better price because they were prepared for it.
Here is what buyers, and their attorneys, are generally looking for when they dig into a small business.
1. Clean financials that actually tie out
Buyers want to see financial statements that are consistent with tax returns, bank records, and accounting system reports. When numbers do not match across these sources, it raises questions about which numbers are real.
Sellers who keep organized, consistent books tend to move through this stage much faster. Sellers who commingle personal and business expenses or run significant cash transactions off the books create real friction, and often real price reductions, when this comes to light.
2. Contracts, leases, and whether they can even be transferred
Buyers review key customer contracts, vendor agreements, and leases to understand what is actually being acquired and whether those relationships survive a change in ownership. Many contracts include consent or assignment provisions that require the other party's approval before they can transfer.
Missing this step is a common source of post-closing headaches. A key customer contract that cannot be assigned without consent can materially change the value of what is being purchased.
3. Employment matters and key person risk
Buyers want to understand who actually runs the business day to day. If the business depends heavily on the owner's personal relationships or expertise, that is a risk a buyer needs to plan for, whether through a transition period, an employment agreement, or a lower price.
Buyers also review employment agreements, independent contractor classifications, and any pending employment disputes. Misclassified workers can become an expensive problem after closing.
4. Litigation history and outstanding liabilities
Buyers ask about past and pending lawsuits, regulatory complaints, and unresolved claims. They also look for liens, judgments, and undisclosed debts that could attach to the business or its assets.
In an asset sale, careful buyers still want assurance that liabilities are not somehow following the assets. In a stock sale, this concern is even more pronounced, since the buyer generally takes the company subject to its existing liabilities.
5. Licenses, permits, and regulatory compliance
Depending on the industry, buyers look closely at whether the business holds the necessary licenses and permits, and whether those can transfer to a new owner. Regulatory compliance history matters too, particularly in regulated industries.
A business that looks profitable on paper can lose significant value if a key license does not transfer smoothly or if compliance gaps surface during review.
Good preparation before due diligence begins tends to produce better outcomes for sellers, and a smoother process for buyers. If you are getting ready to buy or sell a business and want help preparing for this stage, reach out through blgattorney.com or contact my Oklahoma City office.