Due Diligence Checklist for Buying a Small Business

Due diligence is your investigation of a business before you close. A workable checklist goes area by area: financial, customers, employees, legal, taxes, licenses, operations, technology, real estate and insurance. For each area, ask for specific documents, decide what a worrying answer looks like, and tie each finding to a decision: change the price, change the terms, add a closing condition or walk away. This primer is for buyers who have a letter of intent (or are close to one) and want a working list for their accountant, attorney and insurance broker.

Who does what in due diligence?

Due diligence is the buyer's investigation of the business before closing. One advisory firm groups it into four areas: financial, operations, legal and human resources. That is a common way to organize the work, not a legal standard, and deals differ in how deep each area goes. The SBA's guide for people buying an existing business says to check licenses, permits, zoning and environmental issues, ask about contracts, leases, cash flow and inventory, and consider hiring an attorney and an accountant.

The workload is shared. Here is a typical split.

If you use an SBA 7(a) loan to buy a business, expect your lender to do part of this work. The SBA's lender rulebook, Standard Operating Procedure (SOP) 50 10 8.1 (effective October 1, 2026), makes financial diligence part of underwriting. That includes an independent business valuation, a quality of earnings report on larger deals, and a check of the seller's tax returns against IRS transcripts. The lender can pass these costs to you. Other lenders set their own rules.

What should a small business due diligence checklist include?

Use the table as a request list and decision log, and add items for your industry.

What should you check first in the financial records?

Start with the numbers because everything else, from price to loan size, hangs on them. Ask for the profit and loss statements, general ledger, bank statements, federal tax returns, payroll tax reports and a sales breakdown by customer. Then test them against each other. The warning signs one advisory firm lists are inflated revenue, hidden or deferred expenses, early revenue booking and unusual year over year changes on the balance sheet.

A simple first pass: do deposits in the bank statements roughly match reported revenue, do payroll tax filings match the payroll expense, and does the tax return tell the same story as the internal statements? The SBA's version of this, for larger deals, is the quality of earnings review's "cash proof," which rebuilds cash receipts and disbursements from bank statements.

Go deeper in reading financial statements before you buy, what is a quality of earnings report and how small businesses are valued, which shows why a $10,000 adjustment can move the price by a multiple of $10,000.

How do you check insurance and claims during diligence?

Insurance diligence tells you two things: what claims the business has had, and whether the program in place matches the business you are about to own. The library's insurance checklist for buying a business owns the pre-closing list. In short, ask the seller for these items and give them to your broker early:

1. A schedule of every policy (carrier, policy number, limits, deductibles, premium and renewal date), plus the declarations pages and the full policies with endorsements. The declarations page is a summary and does not show the wording that decides a claim. See declarations page vs full policy.
2. Loss runs from each carrier (the carrier's record of claims paid and open) and a list of open claims with reserves. The seller usually has to request these from its carriers. See how to read loss runs.
3. Workers' compensation payroll by class, the experience modification worksheet and recent premium audits. In states that follow National Council on Compensation Insurance (NCCI) rules, experience usually follows the business through a sale. Other states and rating bureaus differ. Four states (Ohio, North Dakota, Washington and Wyoming) require coverage from a state fund, and in Washington and Ohio a buyer can become responsible for a seller's unpaid premiums. Ask your broker and counsel about successor rules and whether the ownership change must be reported. In NCCI states the policy generally requires telling your insurer within 90 days, and the rating bureau then decides what happens to the mod, which can be revised back to the date of the change, up or down. See new owner review: workers' compensation.
4. Whether each liability policy is written on an occurrence basis (responds to injury or damage that happens during the policy period) or a claims-made basis (responds to claims first made and reported during the policy period or an extended reporting period). A claims-made policy covers only work after its retroactive date, the earliest date of work it covers. Ask for each retroactive date. In a stock deal, also ask which claims-made policies have change in control provisions and what notice they require. That often decides who responds to old claims and whether a tail is needed.
5. The insurance requirements in customer contracts, the lease and any loan documents, the certificates the seller has issued, and any premium financing, unpaid audit balances or cancellation notices.

Which policy responds to an old claim depends on the deal structure and the wording. See stock deal vs asset deal, whose insurance responds to old claims. A quote or an application is not bound coverage, so line up your own coverage with the carrier before closing day.

What do you do with what you find?

A diligence finding is only useful if it changes something. The table pairs common findings with the usual responses. Which response fits depends on size, cause and what the purchase agreement says, so this is a conversation starter for your counsel, not advice.

A hypothetical example. A buyer is pricing a $1,800,000 asset purchase. The seller's customer list shows one account at 40 percent of revenue under a contract that requires consent to assignment. The loss runs show two open general liability claims. The seller's workers' compensation policy was audited last year with a balance due. The buyer's response, in order:

1. Ask counsel about making the customer's consent a closing condition.
2. Ask the seller to obtain the status and reserves on both open claims from its insurer or adjuster (reserves are the carrier's current estimate, not the final cost). Then ask counsel whether the claims should be excluded liabilities backed by an escrow.
3. Ask counsel and the broker who owes the audit balance (usually the named insured on the policy, which in an asset deal is normally the seller) and how the purchase agreement allocates it.

None of those steps changes the business, but each changes who pays if the facts turn out badly. See seller indemnities vs insurance for what an indemnity is really worth.

How do you run diligence without losing track?

1. Send one request list. Use the table above, add industry items, and give each row an owner on your side and a due date for the seller.
2. Use a shared folder and a tracker. Log each item as requested, received, reviewed or open.
3. Hold a weekly call. Ten minutes with your accountant, attorney and broker beats a long email thread.
4. Keep a findings log. For each finding write the source, the dollar or deal impact if you can estimate it, and the proposed response.
5. Check the dates. If your letter of intent has an exclusivity period, work backward from its end. See what is a letter of intent.
6. Tell your lender and investors early. News is easier to handle early than as a surprise to the people funding the deal.

Morrow can review the insurance documents you collect, flag gaps against the business you are buying and request quotes so your model has real numbers. Morrow does not provide legal, tax or valuation advice.

Keep reading

• What Is a Letter of Intent When Buying a Business?
• What Is a Quality of Earnings Report?
• Questions to Ask a Seller Before You Buy a Business
• Red Flags When Buying a Business
• I Just Bought a Business. How Do I Check My Insurance?
• All guides for new business owners

Frequently asked questions

How long does due diligence take when buying a small business?

It varies. One sell-side advisory firm says diligence typically lasts 30 to 60 days in its deals, and deals financed with SBA loans can take longer because of lender underwriting and independent reports, so ask your lender for its timeline. The dates in your letter of intent and purchase agreement control.

What documents should I ask the seller for first?

Start with profit and loss statements, the general ledger, bank statements, federal tax returns, payroll tax reports and sales by customer. Then add contracts, the lease, licenses, the employee list and insurance records.

Do I need an accountant and a lawyer for due diligence?

The SBA guide for buyers says to consider hiring an attorney and an accountant. They look at different things: the accountant tests the numbers, the attorney reads contracts and the purchase agreement, and each can catch what the other will not.

What insurance records should I ask for in diligence?

Ask for a schedule of policies, the declarations pages, full policies with endorsements, loss runs from each carrier, open claims, workers' compensation payroll and experience modification records, and the insurance requirements in key contracts and the lease.

Can insurance cover a problem I find in diligence?

Usually not. Insurance generally responds to unknown or future losses, not to problems you already know about. A claim already reported to the seller's carrier is usually handled under the seller's policy, but your new policy generally will not cover known problems. Known issues are normally handled through price, exclusions, specific indemnities, escrows or closing conditions.

What are the biggest red flags in due diligence?

Common ones are revenue that does not match the bank statements, one customer making up a large share of sales, licenses held in the seller's personal name, and open claims or lawsuits the seller has not mentioned. Each one should map to a price, term or closing condition decision with your advisors.

References

• Morgan & Westfield: Acquired, Ch. 21, 4 Types of Due Diligence (sell-side advisory firm, 2026)
• U.S. Small Business Administration: Buy an existing business or franchise
• U.S. Small Business Administration: SOP 50 10 8.1, Appendix 15, change of ownership (effective October 1, 2026)
• 29 U.S.C. 2101: WARN Act definitions and sale of business rule (Cornell Legal Information Institute)
• Morgan & Westfield: Acquired, Ch. 22, From Signing to Closing (sell-side advisory firm, 2026)
• NCCI: Experience Rating Plan Manual, Item E-1411, ownership change rules (effective July 1, 2025)

This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.