Business Acquisition: Due Diligence
Jonathan Dolphin
President, 21st Century Bank
Business acquisition due diligence is a critical stage in the process of buying a business – this helps both the buyer and lender secure accurate, complete and realistic information aimed at helping you make a solid decision.
21st Century Bank’s expert lending team has more than 105 years of experience in closing small business loans – and we’re committed to ensuring nothing from this process gets missed.
Buyer Due Diligence Benefits
Due diligence helps verify the business’s financial health, uncover liabilities, assess operational and identify if it’s a strategic fit. Importantly, this confirms the value of the assets you’re securing — ensuring you’re making a sound investment with no surprises.
Seller Due Diligence Benefits
This process reduces risk by confirming the soon-to-be-bought business can repay the loan – while also validating the purchase price through a trusted valuation.
How to Conduct Due Diligence During a Business Acquisition
These are a list of documents to evaluate during the due diligence process:
Corporate Tax Returns | 3 Years
Year-To-Date Income Statement & Balance Sheet
o Compared to the same period of the prior year, and includes assets and liabilities.
Breakdown of Sales by Customer | 2 Years
o This is important and helps you determine if the company has an increased risk of cash flow volatility, such as relying too heavily on one client.
Sales By Month | 2 Years
o This helps bankers understand the cash flow cycle.
Equipment & Inventory List
Accounts Receivable
o This shows who the company is still waiting on payment from.
Accounts Payable
o This shows who the company owes money to.
Employee List and Compensation
UCC-1 Search For Company
o This is done to ensure debt that the former owners have will be paid off with the transfer of ownership.
Facility Lease/Rent
What Questions Should Be Asked During Due Diligence?
In addition to the financials, you’re going to want to dive deep to ensure you fully understand how the business operates – and where it succeeds and where it can improve. Ask questions including:
Initial Review & Strategic Fit
• What are the company’s products/services, and how do they fit with your goals?
• Who are the key customers? Any concentration risk?
• What is the company’s reputation in the market?
• What are the company’s competitive advantages or risks?
• Why is the business being sold?
• Are there any upcoming changes in the industry that could impact the business?
• What are the biggest risks and challenges facing the business?
• Are there opportunities for growth or expansion?
• How dependent is the business on the current owner?
Financial Due Diligence
• Three to five years of financial statements (income statement, balance sheet, cash flow)
• Interim (year-to-date) financials
• Tax returns (3–5 years)
• Revenue breakdown by product/service
• Gross margin trends
• Debt and liabilities
• Accounts receivable and payable aging
• Inventory detail and valuation method
• Capital expenditure history and needs
Legal & Corporate Structure
• Articles of incorporation, bylaws, and shareholder agreements
• Organizational chart and list of key personnel
• Employee contracts and benefits summary
• Litigation history or pending disputes
• Intellectual property (trademarks, patents, copyrights)
• Regulatory licenses or permits
• Environmental compliance (if applicable)
• Is the business involved in any current or past legal disputes?
• Is it fully licensed and compliant with local, state, and federal regulations?
• Are there any pending lawsuits, liens, or government investigations?
• Are all intellectual property rights (logos, trademarks, patents) properly registered and transferable?
Operational Review
• List of key suppliers and vendor agreements
• Lease agreements and property ownership
• Insurance policies (coverage, expiration, claims history)
• IT systems and cybersecurity status
• Processes and standard operating procedures
• Product warranties or return policies
• What does a typical day-to-day operation look like?
• What systems or processes are in place (e.g., inventory, CRM, accounting)?
• Are there any key vendors or suppliers with exclusive contracts?
• What assets or equipment are included in the sale—and are they in good condition?
Sales, Marketing, and Customers
• Who are your top customers, and how much do they contribute to revenue?
• What’s the current customer retention rate?
• Customer contracts (including renewals or terminations)
• What marketing strategies are in place, and how effective are they?
• Are there long-term customer or supplier contracts?
Human Capital & Culture
• Employee handbook or HR policies
• What is the company culture and employee turnover rate?
• Union agreements (if any)
• Are there any employment contracts, benefits, or severance agreements?
• Who are the key employees, and what are their roles and salaries? Will they stay?
Risk Assessment & Red Flags
• Are there discrepancies between reported financials and tax documents?
• Any contingent liabilities or off-balance-sheet items?
• Are customer or vendor relationships at risk?
• Are there gaps in contracts or missing documentation?
• Any signs of deferred maintenance or underinvestment?
Download: Due Diligence Checklist
Business acquisition due diligence is the process of verifying a business's financial health, liabilities, and strategic fit before completing a purchase, helping both the buyer and the lender confirm it's a sound investment with no surprises.
Key documents include three years of corporate tax returns, year-to-date income statements and balance sheets, two years of sales breakdowns by customer and by month, an equipment and inventory list, accounts receivable and payable, an employee list with compensation, a UCC-1 search, and the facility lease.
Buyers should review the company's products and services, customer concentration, market reputation, and the reason for the sale, alongside financial, legal, operational, sales, and staffing questions covered in each due diligence category.
SBA due diligence follows the same core financial and operational review as any acquisition, with 21st Century Bank's SBA Lending Team guiding buyers through the process as a Top Minnesota SBA Preferred Lender.
Start the SBA Loan Process
When you’re ready to dive deeper into the business acquisition process we welcome aspiring entrepreneurs to reach out with any questions – whether you intend to become a customer or not.
21st Century Bank is a Top Minnesota SBA Preferred Lender – and importantly, we’re locally-owned and family-run. Our bank has an expert SBA Lending Team skilled in due diligence. It’s vital to our organization that we support business owners throughout the Twin Cities in creating a strong, regional economy which supports entrepreneurship.
We’re on standby whenever you need us. We look forward to talking!