What Is Buy-Side Due Diligence?
Buy-side due diligence is the comprehensive investigation a buyer conducts before completing a business acquisition. Unlike seller-side due diligence — where a seller prepares their business for sale by organizing documents and addressing issues proactively — buy-side due diligence is your independent verification of everything the seller has claimed.
For SBA-financed acquisitions, buy-side due diligence is non-negotiable. Your lender expects you to have thoroughly investigated the business, and your due diligence findings will directly shape your loan application, business plan, and financial projections.
At GoSBA Loans, we’ve facilitated over $320 million in SBA funding in 2025 through our network of 50+ lenders. We’ve seen what separates buyers who close successfully from those who don’t — and thorough buy-side due diligence is almost always the difference.
Buyer Due Diligence vs. Seller Due Diligence: Key Differences
Understanding this distinction helps you approach the process with the right mindset.
Seller-Side Due Diligence
- Conducted by the seller before listing the business
- Goal: Present the business in the best possible light
- Focuses on organizing documents, fixing obvious issues, and preparing a clean data room
- The seller controls the narrative
Buy-Side Due Diligence
- Conducted by the buyer after signing the LOI
- Goal: Independently verify every material claim and uncover hidden risks
- Focuses on validation, risk identification, and valuation confirmation
- You control the investigation — and you should be skeptical
Why the Distinction Matters
Sellers naturally present information in the most favorable light. Numbers might be technically accurate but presented in misleading ways. Buy-side due diligence means going beyond the seller’s narrative to find the truth:
- Don’t just review the P&L the seller provides — request the underlying bank statements and tax returns to verify the numbers independently.
- Don’t just accept the customer list — analyze revenue concentration, retention rates, and customer satisfaction.
- Don’t just read the lease summary — get the actual lease agreement and speak directly with the landlord.
The Critical Documents to Request
Your document request list should be comprehensive. Here’s a detailed breakdown organized by category:
Financial Documents
- Federal tax returns — 3 years minimum (business and personal for pass-through entities)
- Profit and loss statements — Monthly for 3 years, year-to-date for current year
- Balance sheets — Year-end for 3 years plus current interim
- Cash flow statements — Annual for 3 years
- Bank statements — 12-24 months for all business accounts
- Accounts receivable aging report — Current, with historical bad debt write-offs
- Accounts payable aging report — Current, showing payment patterns
- Debt schedule — All outstanding loans, lines of credit, and equipment leases with terms
- Sales tax returns — 3 years (these independently verify revenue)
- Credit card processing statements — 12 months (another independent revenue verification)
Operational Documents
- Employee roster — Names, positions, hire dates, compensation, and benefits
- Employment agreements — Especially for key employees
- Non-compete agreements — For any employees with customer relationships
- Organizational chart — Who reports to whom
- Standard operating procedures — If they exist (and note if they don’t)
- Vendor and supplier list — With contract terms and pricing
- Customer list — With revenue breakdown by customer
- Equipment list — With age, condition, maintenance records, and estimated replacement costs
- Inventory records — Current valuation and turnover analysis
- Technology and software list — Licenses, subscriptions, and transferability
Legal Documents
- Real estate lease — Full agreement including amendments and options
- All material contracts — Customer agreements, service contracts, vendor agreements
- Business licenses and permits — Current status and transferability
- Insurance policies — Current coverage, claims history, and premiums
- Litigation history — Pending, threatened, and resolved legal matters
- Intellectual property — Trademarks, patents, copyrights, and domain names
- Corporate documents — Articles of incorporation, bylaws, operating agreements
- Environmental reports — If applicable (manufacturing, gas stations, dry cleaners, auto)
Financial Analysis Checklist
Requesting documents is step one. Analyzing them properly is where the real work happens.
Revenue Verification
- Cross-reference revenue sources: Compare P&L revenue to tax returns, bank deposits, sales tax returns, and credit card processing statements. All four should tell a consistent story.
- Identify revenue trends: Is revenue growing, flat, or declining? Calculate the compound annual growth rate (CAGR) over 3 years.
- Analyze seasonality: Understand monthly revenue patterns and how they affect cash flow.
- Assess revenue quality: Recurring revenue (contracts, subscriptions) is more valuable than one-time project-based revenue.
Expense Analysis
- Identify owner add-backs: Calculate true SDE by adding back owner compensation, personal expenses, and non-recurring costs.
- Scrutinize add-backs: Not everything a seller calls an “add-back” is legitimate. Be conservative — your SBA lender will be.
- Benchmark margins: Compare gross margins and operating margins to industry averages. Significant deviations need explanations.
- Look for missing expenses: Some owners defer maintenance, skip insurance, or underpay employees to inflate profits before a sale.
Working Capital Assessment
- Calculate working capital needs: Current assets minus current liabilities. You need adequate working capital to operate from day one.
- Negotiate working capital targets: The purchase agreement should specify a minimum working capital amount at closing.
- Plan for post-closing needs: Will you need additional working capital beyond what’s included in the purchase? Factor this into your SBA loan request.
Debt Service Coverage
- Model your loan payments: Calculate monthly and annual debt service based on your expected SBA loan terms.
- Calculate DSCR: Adjusted cash flow divided by total annual debt service. Target 1.25x minimum; 1.35x+ is comfortable.
- Stress test: What happens if revenue drops 10-15%? Does the DSCR still hold? Lenders appreciate buyers who’ve considered downside scenarios.
Operational Risk Assessment
Financial analysis tells you what the business has done. Operational risk assessment tells you whether it can continue — and under new ownership.
Owner Dependency Risk
This is the #1 operational risk in small business acquisitions.
- What percentage of the owner’s time does the business require?
- Does the owner have personal relationships with key customers that can’t be transferred?
- Are critical decisions, processes, or knowledge locked in the owner’s head?
- How long will the owner stay for transition training?
Mitigation: Negotiate a robust transition period (30-90 days), require SOPs to be documented before closing, and consider tying a portion of the purchase price to a successful transition.
Customer Concentration Risk
- What percentage of revenue comes from the top customer? Top 5 customers? Top 10?
- Are there contracts in place, or are relationships informal?
- What is the customer retention rate over the past 3 years?
- Have any major customers been lost recently or expressed intention to leave?
Rule of thumb: If any single customer represents more than 15-20% of revenue, it’s a significant risk that needs to be factored into your valuation and discussed with your lender.
Employee Risk
- Will key employees stay after the acquisition?
- Are there any employment disputes, claims, or pending issues?
- Is the workforce adequately compensated relative to market rates? (Underpaid employees may leave once the owner changes.)
- Are there key-person dependencies beyond the owner?
Market and Competitive Risk
- Is the industry growing, stable, or declining?
- Are there new competitors, technology disruptions, or regulatory changes that could impact the business?
- What is the business’s competitive advantage, and is it sustainable?
Facility and Equipment Risk
- What is the remaining useful life of critical equipment?
- Are there deferred maintenance issues that will require near-term capital expenditure?
- Is the facility adequate for current operations and modest growth?
- Are there any building code, zoning, or ADA compliance issues?
How to Use Due Diligence Findings to Negotiate Price or Structure
Due diligence isn’t just about confirming the deal — it’s a powerful negotiation tool. Here’s how to leverage your findings:
Price Adjustments
- Overstated earnings: If add-backs are inflated or revenue is declining, the SDE/EBITDA is lower than represented, which directly reduces the justified purchase price.
- Capital expenditure needs: If equipment needs replacement or the facility needs repairs, deduct those costs from your offer.
- Customer concentration: Higher risk justifies a lower multiple.
- Working capital shortfall: If current working capital is below what you need to operate, negotiate for the seller to bring it up to the target level at closing.
Structure Adjustments
- Increase seller financing: If you’ve uncovered risks, ask for more seller financing (seller note). This keeps the seller invested in the business’s post-closing success.
- Add an earnout provision: If the seller insists the business is worth more than your due diligence supports, propose an earnout where they receive additional payment if the business hits certain performance targets.
- Extend the transition period: If owner dependency is high, negotiate a longer and more structured training and transition period.
- Add representations and warranties: If due diligence reveals areas of uncertainty, strengthen the seller’s reps and warranties in the purchase agreement to protect yourself.
- Escrow or holdback: Negotiate a portion of the purchase price to be held in escrow for 6-12 months to cover any undisclosed liabilities that emerge post-closing.
Using the SBA Lender as Leverage
Your SBA lender’s requirements can be a powerful — and objective — negotiation tool:
- “My lender requires a DSCR of 1.25x, and at the current asking price, we’re only at 1.1x. We need to bring the price down or increase seller financing to make the math work.”
- “The third-party valuation came in below the asking price. My lender will only finance up to the appraised value.”
- “My lender requires the lease to cover the full loan term. We need the landlord to extend or the price needs to reflect the lease risk.”
These aren’t adversarial positions — they’re factual requirements. Most sellers understand that SBA financing has rules, and framing negotiations around lender requirements removes personal emotion from the discussion.
Organizing Your Buy-Side Due Diligence
A structured process prevents important items from falling through the cracks:
- Send your document request immediately after signing the LOI — don’t waste a single day of your due diligence period.
- Create a tracking spreadsheet listing every document requested, date requested, date received, and status of review.
- Engage your team early: Your CPA should review financials, your attorney should review legal documents, and your SBA lender should receive materials as they become available.
- Conduct site visits: Walk the facility, inspect equipment, observe operations during business hours, and talk to employees (with the seller’s permission).
- Build your business plan in parallel: Your due diligence findings should flow directly into the business plan and financial projections that your SBA lender requires.
Let GoSBA Guide Your Due Diligence and Secure Your Financing
Buy-side due diligence is the most important phase of any SBA acquisition. It protects your investment, strengthens your negotiating position, and builds the foundation for a successful loan application.
At GoSBA Loans, our service is completely free to borrowers. Here’s what we provide:
- A professional business plan and financial projections valued at $2,500-$5,000 — built from your due diligence findings and tailored for SBA approval
- Access to 50+ SBA lenders who compete for your deal, ensuring the best terms
- Expert guidance throughout due diligence — we know what lenders look for and help you focus on what matters
- Over $320 million funded in 2025 — our track record speaks for itself
Don’t navigate buy-side due diligence alone. Our team has seen thousands of deals and knows exactly how to turn your findings into a winning loan package.
Contact GoSBA today for a free consultation and let us help you buy your business with confidence.
