What happens during due diligence when selling a business?

Short answer: Due diligence is the buyer's structured investigation of every material aspect of the business, running 45 to 90 days post-LOI. It covers financials, legal, operations, customers, and employees. Surprises during this phase are the leading cause of deal failure and price re-trading. The best preparation is running your own diligence before the buyer does theirs.

What triggers due diligence

A signed letter of intent (LOI) triggers due diligence and grants the buyer an exclusivity period, typically 45 to 90 days, during which the seller cannot negotiate with other buyers. In exchange, the buyer commits to completing their investigation within that window and either proceeding to purchase agreement or walking away. The LOI is not a binding purchase commitment; it is the starting gun for the final phase of the sale process.

The five major tracks of due diligence

Financial due diligence

The buyer's accounting firm (often the same firm performing the quality-of-earnings review) examines three to five years of financial statements, tax returns, and management accounts. They verify every add-back in the seller's adjusted EBITDA, examine revenue recognition practices, test accounts receivable aging, review inventory valuation, and reconcile working capital. Any discrepancy between what the seller represented and what the financials show is grounds for price renegotiation or deal termination.

Legal due diligence

The buyer's attorneys review all material contracts, including customer agreements, supplier contracts, employment agreements, real estate leases, IP licenses, and loan documents. They examine the corporate record book, verify ownership of intellectual property, review any pending or threatened litigation, and check for change-of-control provisions in major contracts that require customer or counterparty consent for the deal to close.

Customer and market due diligence

Strategic buyers often conduct customer interviews or reference checks, particularly for the top 10 to 20 customers by revenue. They assess retention risk, customer satisfaction, and whether relationships are with the owner personally or with the business institutionally. This is the phase where owner-dependent customer relationships create the most deal risk.

Operational due diligence

The buyer evaluates the business's internal processes, technology infrastructure, supply chain, and operational capacity. For PE buyers, this often includes an assessment of whether the business can support add-on acquisitions. For strategic buyers, it focuses on integration planning and identifying cost synergies.

Human capital due diligence

Buyers assess the management team's depth, compensation structures, retention risk, employment agreements, and any HR liabilities (pending claims, non-compete enforceability, benefits obligations). Senior leadership interviews are common. This is typically the most sensitive track because it involves direct contact with the team before closing is certain.

What causes deals to fall apart during due diligence

• Financial restatements: revenue or EBITDA lower than represented pre-LOI
• Undisclosed liabilities: lawsuits, environmental cleanup obligations, unpaid taxes
• Customer concentration worse than disclosed: one customer larger than represented
• IP ownership gaps: software, patents, or trademarks not clearly owned by the entity being sold
• Change-of-control clauses in major contracts requiring third-party consent
• Key employee departures during the process after rumors circulate

How to prepare before the buyer starts

The most effective preparation is running a sell-side quality-of-earnings review and a legal readiness review 12 to 18 months before going to market. This surfaces the issues a buyer's diligence team will find, gives the seller time to address or disclose them proactively, and dramatically reduces the likelihood of price re-trading after LOI. Sellers who arrive at LOI with clean, pre-audited diligence materials typically close in 45 to 60 days. Sellers who have not prepared often see processes extend to 90 to 120 days or collapse entirely.

See the full article on quality of earnings for what the financial portion of diligence examines in detail.