Last updated: 2026-02-19
Buy a Business India
20 min read
Due Diligence Checklist: What to Check Before Buying a Business
Due diligence is the comprehensive investigation of a business before finalizing an acquisition—examining financial records, legal compliance, operations, customers, and employees to verify seller claims and uncover hidden risks.
What is due diligence when buying a business?
Due diligence is the buyer's investigation period between signing a Letter of Intent (LOI) and closing the purchase, typically lasting 4-8 weeks, where you verify every material claim the seller has made about the business. This is your last opportunity to discover problems before committing your capital.
Key Insight
The goal of due diligence isn't to find the perfect business — it's to understand exactly what you're buying, including the problems. Every business has issues. What matters is whether you can live with them and price them appropriately.
| Due Diligence Area | What You're Checking | Typical Duration |
|---|---|---|
| Financial | Revenue, profit, cash flow accuracy | 2-3 weeks |
| Legal | Compliance, contracts, litigation | 2-3 weeks |
| Tax | GST, income tax, PF/ESI compliance | 2-3 weeks |
| Operational | Systems, processes, quality | 1-2 weeks |
| Customer | Revenue quality, relationships | 1-2 weeks |
| Employee | HR compliance, key person risk | 1-2 weeks |
Why is due diligence critical for business buyers?
Due diligence protects you from overpaying for a business, inheriting hidden liabilities, and discovering operational problems after it's too late to adjust price or walk away. Skipping or rushing due diligence is the most common mistake first-time buyers make.
Cost of Incomplete Due Diligence:
- • Undisclosed tax liability: ₹10-50 lakh+ in back taxes, penalties
- • Pending litigation: Unknown damages, legal fees
- • Customer concentration (key customer leaving): 20-50% revenue loss
- • Equipment needing replacement: ₹5-30 lakh capital requirement
- • Lease not transferable: Business must relocate
- • PF/ESI non-compliance: Back payments plus penalties
Financial Due Diligence Checklist
Review at least 3-5 years of income tax returns, GST filings, bank statements, audited financials (if available), and detailed accounts receivable/payable aging to verify reported revenue and profitability.
Documents to Request:
- ☐ Income Tax Returns (3-5 years)
- ☐ GST Returns - GSTR-1 & GSTR-3B (2+ years)
- ☐ Bank statements - all accounts (3 years)
- ☐ Revenue reconciliation (books vs bank vs GST)
- ☐ Profit & Loss statements (3 years)
- ☐ Balance sheets with asset verification
- ☐ Accounts receivable aging report
- ☐ Accounts payable and debt schedule
Key Insight
Bank statements don't lie. Request 12-24 months of bank statements and reconcile deposits with reported revenue. If there's a significant gap, investigate why. Cash businesses without verifiable revenue are high-risk acquisitions.
Tax Compliance Checklist
Verify compliance with Goods and Services Tax (GST), Income Tax, Employee Provident Fund (EPF), Employees' State Insurance (ESI), and Professional Tax to avoid inheriting liabilities and penalties.
| Tax Type | Typical Non-Compliance Issues | Risk Level |
|---|---|---|
| GST | Late filing, input credit mismatches | High (penalties steep) |
| Income Tax | Underreported income, TDS defaults | High |
| EPF | Non-registration, underpayment | High (employee claims) |
| ESI | Non-coverage of eligible employees | Medium-High |
| Professional Tax | Non-deduction | Low-Medium |
Legal Due Diligence Checklist
Legal due diligence covers business registration, all licenses and permits, property rights, contracts and agreements, intellectual property, and any pending or potential litigation.
Licenses & Permits
- ☐ Shop and Establishment license
- ☐ Trade license (municipal)
- ☐ FSSAI license (if food business)
- ☐ Pollution/environmental clearances
- ☐ Factory license (if applicable)
- ☐ Industry-specific licenses
Contracts to Review
- ☐ Customer contracts (top 10)
- ☐ Supplier agreements
- ☐ Lease/rental agreements
- ☐ Loan agreements
- ☐ Insurance policies
- ☐ Non-compete agreements
Customer & Revenue Quality Checklist
Review customer concentration, revenue retention rates, contract terms, and speak directly with major customers to verify relationships and understand their intentions post-acquisition.
| Customer Metric | Low Risk | Medium Risk | High Risk |
|---|---|---|---|
| Top customer % | <10% | 10-25% | >25% |
| Top 5 customers % | <35% | 35-50% | >50% |
| Contract coverage | >70% contracted | 40-70% | <40% |
| Average tenure | >5 years | 2-5 years | <2 years |
HR & Employee Due Diligence
Review employee contracts, compensation structure, statutory compliance (EPF, ESI), key person retention risk, and organizational culture to understand workforce stability and potential liabilities.
Key Insight
Meet key employees before closing, ideally with the seller present. Assess their attitude toward the transition and likelihood of staying. Consider retention bonuses or incentives for critical people.
Due Diligence Timeline
| Week | Activity |
|---|---|
| 1-2 | Document request and initial review; financial DD |
| 2-3 | Tax and legal review; site visit |
| 3-4 | Operational DD; customer interviews |
| 4-5 | HR review; follow-up on issues found |
| 5-6 | Final verification; DD report compilation |
| 6+ | Negotiation based on findings; close preparation |
Frequently Asked Questions
How long should due diligence take?
Thorough due diligence for a small business acquisition typically takes 4-8 weeks, with the timeline depending on business complexity, seller preparedness, and document availability. Simple businesses with clean records and cooperative sellers can complete due diligence in 3-4 weeks. Complex businesses with multiple locations, large employee bases, or extensive regulatory requirements may need 8-12 weeks. Resist pressure to rush—it's better to extend the timeline than skip verification. Include due diligence duration in your LOI and ensure exclusivity covers the full period plus buffer for final negotiations and documentation.
How much does due diligence cost?
Professional due diligence for a small business acquisition typically costs ₹75,000 to ₹3 lakh, covering CA fees for financial review, lawyer fees for legal examination, and possibly consultant fees for operational assessment. For a straightforward acquisition under ₹50 lakh, budget ₹75,000-1.5 lakh. For ₹50 lakh to ₹2 crore deals, budget ₹1.5-3 lakh. Larger or complex transactions may require more extensive (and expensive) review. This cost is small compared to deal value and potential savings from issues discovered. Many buyers who skip professional due diligence to save money end up paying far more to fix problems they inherit.
What are the biggest red flags in due diligence?
The biggest red flags include major discrepancies between reported and verified revenue, undisclosed liabilities, pending litigation, key employee flight risk, and non-transferable critical assets or contracts. Also watch for: seller unable or unwilling to provide requested documents, revenue heavily dependent on owner relationships, equipment in poor condition not matching representations, significant compliance gaps (tax, regulatory), and lease issues that could force relocation. One red flag may be manageable; multiple red flags suggest walking away or significant price adjustment. Trust your instincts—if something feels wrong, investigate further.
What happens if I find problems during due diligence?
Problems discovered during due diligence are opportunities to renegotiate price, adjust deal structure, require indemnification, or walk away from a bad deal. Quantify each issue's financial impact. Present findings to the seller factually, not accusatorially. Propose solutions: price reduction for quantifiable issues, escrow holdbacks for uncertain liabilities, indemnification clauses for potential future claims, or earnout structures that shift risk. If the seller refuses reasonable adjustments for material issues, be willing to walk away. The best protection from a bad deal is not doing it. Your due diligence period exists specifically for this purpose.
Should I do due diligence myself or hire professionals?
For any acquisition above ₹25-30 lakh, engage professionals—a CA for financial due diligence and a lawyer for legal review—while still being actively involved yourself. Professionals bring expertise, experience, and objectivity. They know what to look for and can spot issues you'd miss. However, don't outsource entirely. Participate in document review, join site visits, conduct customer conversations yourself, and understand every finding. You're making the investment decision, not your advisors. For smaller deals, you can do more yourself with professional consultation as needed, but never skip legal review of purchase documents regardless of deal size.
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