The Small Business Due Diligence Checklist That Actually Works (Not Just a List to Skim)

Search "due diligence checklist" and you'll find fifty versions of the same list: verify financials, review contracts, check operations. Useless — not because the items are wrong, but because a checklist without pass/fail criteria is a list of topics, not a process. This is the checklist organized the way deals actually fail: financials, operations, customers, legal — with a clear pass/fail test for each item.

Financials — where deals die first

• Three years of P&Ls, tax returns for all three years, and they reconcile. PASS: gaps are timing-related and documented. FAIL: systematic gaps or "the returns are being amended."
• Add-backs are documented. PASS: each has a receipt, invoice, or contract. FAIL: any recurring add-back, or a family salary above market.
• Monthly revenue and marketing spend for 36 months. PASS: no growth that's entirely purchased. FAIL: ad spend growing much faster than revenue.
• Bank statements for the last 12 months. PASS: deposits match reported revenue. FAIL: any gap between banked revenue and reported revenue.

Operations — the question behind every "turnkey"

• Who does what, week to week: written down. PASS: a stranger could staff it at market wages. FAIL: the business depends on the seller's personal hours or unpaid family labor.
• Supplier concentration: no supplier above 30% of COGS with no contract. PASS: contracts or substitutes exist. FAIL: one informal relationship everything depends on.
• The seller stays for a knowledge-transfer period, in writing. PASS: 30-90 days, structured, documented. FAIL: "I'll be available by phone."

Customers — revenue is not the same as durable revenue

• Customer concentration: no single customer above 25% of revenue, or a signed long-term contract if they are. PASS: contract in the data room. FAIL: "they've been with us for years and they're loyal."
• Churn/retention data, if the model has recurring revenue. PASS: it exists and the trend is explainable. FAIL: it isn't tracked.
• Reviews and reputation. PASS: strong, recent, and authentic. FAIL: a pattern of one-star reviews about the exact thing the broker said was fixed.

Legal — boring until it isn't

• All leases, contracts, and licenses assignable without consent. PASS: in writing. FAIL: anything requiring a landlord's or franchisor's "reasonable approval" — price the risk of refusal.
• Litigation history: none undisclosed. PASS: full disclosure, even of minor matters. FAIL: anything discovered in public records that wasn't volunteered.
• Employment: everyone you need is a documented employee or contractor, not a handshake. PASS: payroll records exist. FAIL: "they're like family, we never formalized it."

How to use this

Score each item pass/fail without a middle option. A checklist full of "mostly fine" is how buyers end up owning someone else's problem. The items with the highest correlation to failed deals — tax return mismatches, purchased growth, owner-dependency — are exactly what DealQA scans for on every listing it aggregates across 25+ marketplaces, so the checklist shortens as the deal gets better. Start at getdealscout.ai.