What Is Due Diligence in an SBA Business Acquisition?
Due diligence is the investigative process every buyer must complete before finalizing the purchase of a small business — especially when financing through an SBA loan. Think of it as your opportunity to verify every claim the seller has made, uncover hidden risks, and confirm the business is worth what you’re paying.
For SBA-financed acquisitions, due diligence carries even more weight. Your lender will scrutinize the business just as closely as you do — and if your due diligence is sloppy, your loan approval can fall apart at the eleventh hour.
At GoSBA Loans, we’ve helped facilitate over $320 million in SBA funding in 2025 alone through our network of 50+ lenders. We’ve seen hundreds of deals succeed — and dozens fail — based on the quality of the buyer’s due diligence. This guide walks you through exactly what to examine, what red flags to watch for, and how to organize the entire process.
Why Due Diligence Matters More for SBA Acquisitions
When you’re buying a business with an SBA 7(a) loan, the lender is putting up the majority of the capital. They need to be confident that:
- The business generates enough cash flow to service the debt
- The purchase price is justified by the financials
- There are no hidden liabilities that could sink the business post-closing
- The buyer has the skills and plan to operate successfully
Your due diligence findings feed directly into the SBA loan package. Incomplete or disorganized due diligence is one of the top reasons SBA acquisition loans get denied or delayed.
Financial Due Diligence: Follow the Money
Financial due diligence is the backbone of your investigation. This is where you verify whether the business actually makes what the seller claims it makes.
Tax Returns (3 Years Minimum)
Request the last three years of federal tax returns — both business and personal (if the business is a pass-through entity like an S-Corp or LLC). Tax returns are the gold standard because they’ve been filed with the IRS, making them harder to manipulate than internal financial statements.
- Compare reported revenue on tax returns to the P&L statements the seller provided
- Look for consistency year over year
- Check for any amended returns — these can indicate issues
Profit and Loss Statements
Review monthly and annual P&L statements for at least three years. Key things to examine:
- Revenue trends: Is the business growing, flat, or declining?
- Gross margins: Are they consistent with industry norms?
- Owner compensation: What is the owner actually taking out? This affects your Seller’s Discretionary Earnings (SDE) calculation.
- One-time expenses: Identify non-recurring costs that inflate or deflate true profitability.
Balance Sheet Review
The balance sheet tells you what the business owns and what it owes:
- Accounts receivable: How much is outstanding? What’s the aging? Old receivables may be uncollectible.
- Inventory: Is it current and sellable, or is it obsolete?
- Accounts payable: Are bills being paid on time, or is the seller falling behind?
- Debt obligations: Identify all loans, lines of credit, and equipment leases.
- Assets: Verify the existence and condition of equipment, vehicles, and other tangible assets.
Cash Flow Analysis
Cash flow is king — especially for SBA lenders. You need to confirm:
- The business generates enough free cash flow to cover your SBA loan payments (typically a debt service coverage ratio of 1.25x or higher)
- Cash flow patterns are predictable and not overly seasonal without reserves
- Working capital needs won’t create a cash crunch post-acquisition
Operational Due Diligence: How the Business Actually Runs
Numbers only tell part of the story. Operational due diligence examines the engine behind those numbers.
Employees and Key Personnel
- How many employees does the business have? What are their roles, tenure, and compensation?
- Are there key employees whose departure would significantly hurt the business?
- Review employment agreements, non-competes, and benefit obligations
- Understand the company culture — will employees stay after the transition?
- Check for any pending HR issues, complaints, or disputes
Vendor and Supplier Relationships
- Who are the critical suppliers? Are there contracts in place, or are relationships informal?
- Can supplier agreements be transferred to a new owner?
- Are there concentration risks — does the business rely on a single supplier for a critical input?
- What are the payment terms, and are they favorable?
Customer Base and Revenue Concentration
- How diversified is the customer base? If one customer represents more than 15-20% of revenue, that’s a significant risk.
- Are there long-term contracts, or is revenue dependent on repeat purchases?
- What is the customer retention rate?
- Review online reviews and reputation — this affects future revenue.
Processes and Systems
- Are operations documented, or does everything live in the owner’s head?
- What technology and software does the business use?
- Are there standard operating procedures (SOPs) in place?
- How dependent is the business on the current owner’s personal involvement?
Legal Due Diligence: Protecting Yourself from Hidden Liabilities
Legal due diligence protects you from inheriting problems you didn’t know existed.
Contracts and Agreements
- Review all material contracts — customer agreements, vendor contracts, service agreements
- Check for change-of-ownership clauses that could void contracts upon sale
- Identify any contracts with unfavorable terms that you’d be locked into
- Review franchise agreements if applicable
Lease Agreements
For most small businesses, the real estate lease is critical:
- How much time remains on the lease? SBA lenders typically want the lease term to match or exceed the loan term.
- What are the renewal options and rent escalation terms?
- Is the landlord willing to assign the lease to you as the new owner?
- Are there any personal guarantees or restrictions?
Litigation and Legal Issues
- Search for any pending, threatened, or past litigation
- Check for regulatory violations or complaints
- Review any settlements or judgments
- Verify all necessary licenses and permits are current and transferable
Compliance and Regulatory
- Is the business in compliance with all industry-specific regulations?
- Are there environmental concerns (especially for manufacturing, auto, or food businesses)?
- Verify tax compliance — no outstanding tax liens or unpaid obligations
- Check for any OSHA violations or workplace safety issues
Common Red Flags That Kill SBA Acquisition Deals
After working with thousands of buyers and lenders, here are the red flags that most commonly derail deals:
- Declining revenue trends: Two or more consecutive years of revenue decline make SBA lenders very nervous.
- Cash-heavy businesses with poor records: If the seller claims significant unreported cash income, SBA lenders won’t count it — and neither should you.
- Customer concentration: One customer representing more than 20% of revenue is a deal risk.
- Owner dependency: If the business can’t function without the current owner, transition risk is high.
- Lease problems: A short-term lease with no renewal options or an uncooperative landlord can kill a deal.
- Inconsistent financials: When the tax returns, P&L, and bank statements don’t tell the same story, lenders walk away.
- Pending litigation: Unresolved legal issues create uncertainty that lenders don’t want to underwrite.
- Deferred maintenance: Equipment or facilities that need major capital expenditure right after closing can blow up your cash flow projections.
How to Organize Your Due Diligence Process
A structured approach prevents things from falling through the cracks:
- Create a comprehensive document request list — Send this to the seller within days of signing the LOI.
- Set clear deadlines — Your LOI should specify a due diligence period (typically 30-60 days).
- Use a virtual data room — Organize all documents in a shared folder system.
- Engage professionals — Hire a CPA for financial review and an attorney for legal review.
- Build your business plan simultaneously — Your SBA lender will require a business plan that reflects your due diligence findings.
How GoSBA’s Free Business Plan Helps Organize the Process
One of the biggest challenges buyers face is turning their due diligence findings into a coherent story that SBA lenders want to see. That’s where GoSBA comes in.
Our service is completely free to borrowers, and we provide:
- A professional business plan and financial projections (valued at $2,500-$5,000) — built specifically for SBA loan approval
- Access to 50+ SBA lenders who compete for your deal, ensuring you get the best terms
- Expert guidance on what lenders look for during due diligence
- Deal structuring advice to help you negotiate the right price and terms
We’ve helped facilitate over $320 million in SBA funding in 2025, and our team knows exactly how to translate your due diligence findings into a loan package that gets approved.
Due Diligence Checklist: Quick Reference
Use this as your starting point:
- ☐ 3 years of federal tax returns (business and personal)
- ☐ 3 years of profit and loss statements (monthly)
- ☐ Current balance sheet
- ☐ 12 months of bank statements
- ☐ Accounts receivable and payable aging reports
- ☐ Equipment list with condition and values
- ☐ Inventory valuation
- ☐ Employee roster with compensation details
- ☐ All material contracts and agreements
- ☐ Real estate lease
- ☐ Licenses and permits
- ☐ Insurance policies
- ☐ Litigation history and pending claims
- ☐ Customer list with revenue breakdown
- ☐ Vendor list with terms
Ready to Start Your SBA Acquisition?
Due diligence can feel overwhelming, but you don’t have to navigate it alone. At GoSBA Loans, we guide buyers through every step of the SBA acquisition process — from due diligence through closing — at absolutely no cost to you.
Our 50+ lender network means you get competitive terms, and our free business plan and projections ensure your loan package is built to get approved.
Contact GoSBA today for a free consultation and let us help you close your deal with confidence.
