Selling a Business: What to Expect During Diligence
16 February 2026: Selling a Business: What to Expect During Diligence
Preparing a business for the invasiveness of a buyer’s due diligence is one of the most critical — and underestimated — aspects of a successful transition. Whether you are selling to a strategic acquirer, a private equity firm, or a financial buyer, the due diligence process will be exhaustive, intrusive, and, at times, uncomfortable. Buyers are not just evaluating performance; they are dissecting risk.
Your business will be under a microscope. Understanding how to prepare for this level of scrutiny — operationally, financially, legally, and culturally — can significantly influence valuation, deal certainty, and post-closing success.
Understand Modern Due Diligence
Today’s buyers conduct multilayered investigations that go far beyond reviewing financial statements. In transactions involving private equity firms – which we’re seeing a lot of now – due diligence can include:
- Financial performance and earnings quality
- Tax compliance and exposures
- Legal liabilities and litigation
- Cybersecurity posture
- ESG compliance and sustainability metrics
- HR matters and cultural risks
- Customer concentration and churn
- Supply chain stability
Buyers are looking for red flags, inconsistencies, and hidden liabilities. Any surprise discovered late in the process can materially reduce the purchase price or collapse the deal altogether.
Preparation is not about hiding weaknesses. It is about identifying and contextualizing them before the buyer does.
Clean and Normalized Financials
Financial diligence is often the most intense and the most invasive.
As a tax ploy, owners often compensate themselves with dividends instead of market rate salaries resulting in EBITDA which is artificially inflated. We see this very often with highly profitable small businesses with only one owner.
Some of the issues you should expect buyers to focus on include
- Revenue recognition policies
- Normalized EBITDA adjustments: Are leases and contracts “arm’s length” agreements with unrelated parties?
- Do the financial statements closely track the tax returns?
- Revenue contracts that support reported income
- Expense classifications are consistent: capital vs operation expenses
- Non-recurring expenses: one-time and extraordinary expenses
- Owner-related benefits: the owner’s spouse’s Lamborghini, its maintenance, insurance, fuel and club membership
- Working capital trends
If a buyer discovers inconsistencies in revenue timing or overly aggressive EBITDA add-backs, credibility erodes quickly. Discrepancies are not just accounting issues — they signal operational risk.
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Legal and Corporate Documentation
This is often where the invasiveness of the buyer’s due diligence will be most evident. In our experience, corporate documentation is rarely complete but will be important during this process. Buyers will almost always request:
- Articles of incorporation or organization
- Shareholder of members agreements
- Capitalization tables
- Board minutes
- Key contracts
- Lease agreements
- Customer and supplier contracts
- Intellectual property registrations
Many business owners discover, during diligence, that historic documentation is incomplete. Missing stock option agreements, unsigned contracts, or outdated board approvals, shareholder or member resolutions all create delays and legal complications.
Create a digital data room in advance. Organize documents logically, labeled clearly, and indexed. A chaotic data room implies a chaotic organization.
Customer diligence often goes deeper than sellers expect. Buyers may:
- Conduct customer interviews
- Analyze churn rates
- Review concentration risk
- Evaluate contract terms
- Examine renewal history
If 25% of revenue depends on a single client with a short-term contract, valuation risk increases.
Operational Infrastructure
Operational due diligence evaluates scalability and resilience. Buyers will examine:
- Supply chain dependencies
- Vendor concentration
- Systems infrastructure
- Business continuity planning
- Key person risk
If the business relies heavily on one executive, one supplier, or one legacy IT system, that becomes a discount factor. Review any succession-planning documentation, disaster-recovery plans, operational process manuals and the like. If your business doesn’t have this level of sophistication, consider establishing these tools even in rudimentary form.
Operational maturity directly impacts perceived risk.
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Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to accurately value and successfully sell businesses.
HR and Cultural Risks
Human capital diligence has intensified in recent years. Private equity firms, especially, are focused on:
- Employee turnover rates
- Compensation structures
- Equity incentives
- Employment agreements
- Pending disputes
- Reputational risk: What is the behavioral history of the business or its owners?
Cultural instability is increasingly viewed as financial risk.
If one doesn’t exist, prepare an organizational chart, make sure all employment contracts are up to date and any bonus program is clearly structured. If there has been any profit-sharing, particularly if that program does not cover the entire work force, make sure the program is clearly written that the employees effected by it understand it.
If informal arrangements exist — verbal agreements, undocumented bonuses — formalize them before going to market.
Check out our series The 6 Essential Elements of Selling a Business Successfully (starting 2 February ’26) on our YouTube channel.
Identify Weaknesses BEFORE Coming to MARKET
No company is perfect and each has its unique story, warts and all. But when selling a business it’s important to control the narrative.
If there is:
- Pending litigation
- Regulatory inquiry
- Tax exposure
- Customer dispute
- Key employee departure
Disclose it early and explain mitigation plans.
Buyers price risk. They fear unknown risk more than known risk. Transparency builds trust; surprises destroy it.
Transparency, Confidentiality and Stress
Due diligence requires openness, but sensitive information must be controlled.
Implement:
- Tiered access rights
- NDAs with enforceable clauses
- Redactions for trade secrets
- Gradual disclosure of customer lists
Premature leakage can destabilize employees or clients, energize competitors and damage value – often considerably.
Due diligence can feel invasive because it questions every decision ever made. Sellers often feel personally scrutinized but it’s important to maintain perspective. From many buyers, due diligence is about risk mitigation, not judgment. When the process gets really tedious, remember that, especially in the case of a financial buyer, your buyer is considering risking their family’s financial future.
If the buyer is an investment firm or search firm, the people you’re dealing with must justify their recommendation to investment committees. Preparation reduces stress. When documentation is organized and narratives are clear, the process becomes manageable rather than adversarial.
The Bottom Line
Successfully selling a business requires understanding – and being prepared for – the process, and due diligence is a major part of that process. A well-prepared seller enables a smoother transition, reduces post closing legal issues and indemnity claims and reduces the chances of significant price renegotiation as a result of what the diligence process turns up.
Conversely, hidden issues discovered after closing can lead to litigation, escrow claims, and damaged credibility.
The most successful transactions occur when sellers approach diligence not as a defensive exercise but as an opportunity to demonstrate maturity and readiness. By conducting internal audits, organizing documentation, testing assumptions, and proactively addressing weaknesses, a company transforms due diligence from a threat into a strategic advantage.
In the end, the goal is simple: remove uncertainty. When buyers perceive clarity, control, and credibility, they compete on price rather than negotiate around risk.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at jo*@*******************og.com.
Check out our video series, “How Much is My Business Worth“on our YouTube channel.
“Success is no accident. It is hard work, perseverance, learning, studying, sacrifice and most of all, love of what you are doing or learning to do.”
–Pelé
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at jo*@*******************og.com
