- Due diligence serves two purposes: protecting yourself and satisfying your SBA lender’s documentation requirements.
- Start your SBA financing application in parallel with due diligence—don’t wait until it’s complete.
- The typical due diligence period is 30-60 days after signing a Letter of Intent (LOI).
- Financial verification (tax returns, bank statements, P&L) is the most critical area for SBA loan approval.
Before you buy a business with an SBA loan, thorough due diligence is essential. This process uncovers risks, verifies the seller’s claims, and ensures you’re making an informed decision. It also provides the documentation your SBA lender will need to approve your loan.
This guide provides a comprehensive due diligence checklist organized by category, with specific callouts for items that are critical to SBA loan approval.
Due Diligence Overview
What Is Due Diligence?
Due diligence is your investigation of the business before purchasing. It’s your opportunity to verify everything the seller has represented and uncover anything they haven’t disclosed. Think of it as an inspection period—similar to a home inspection, but for a business.
The Dual Purpose of Due Diligence
Due diligence serves two critical purposes:
- Protect yourself: Verify the business is what it appears to be and identify any red flags before you’re legally committed.
- Satisfy your lender: Provide the documentation required for SBA loan approval. Lenders need to verify the business can support the debt.
Don’t wait until due diligence is complete to start your SBA application. Run both processes in parallel—share documents with your lender as you receive them. This can save 2-4 weeks on your overall timeline to closing.
When to Start
Due diligence typically begins after signing a Letter of Intent (LOI) and lasts 30-60 days. The LOI should specify the due diligence period and what happens if you discover material issues.
Financial Due Diligence
Financial due diligence is the most critical area for SBA loan approval. Your lender will scrutinize these documents closely to verify the business can support the loan payments.
Tax Returns
- 3 years of business tax returns (complete with all schedules)
- 3 years of personal tax returns (seller/owner)
- Verify tax returns match financial statements
- Check for any tax liens or disputes with the IRS
Financial Statements
- Profit and Loss statements (monthly, trailing 24 months)
- Balance sheets (current and year-end for 3 years)
- Cash flow statements
- Accounts receivable aging report
- Accounts payable aging report
Request monthly P&L statements rather than annual summaries. Monthly data reveals seasonality patterns and helps you understand the business’s cash flow cycle—critical information for planning your first year of ownership.
Revenue Verification
- Bank statements (verify deposits match reported revenue)
- Point-of-sale reports or merchant processing statements
- Revenue by customer breakdown (identify concentration risk)
- Revenue by product/service line
- Seasonality patterns over 2-3 years
Add-Backs Documentation
- Owner salary and compensation history
- One-time or non-recurring expenses (with documentation)
- Personal expenses run through business
- Related-party transactions and above-market payments
SBA lenders are skeptical of aggressive add-backs. Every add-back must be documented and defensible. “Trust me, that was a one-time expense” won’t satisfy underwriters. If you can’t prove it, don’t count on it for valuation or debt service calculations.
Debt and Liabilities
- Current loan statements and payoff amounts
- Equipment lease schedules
- Credit card statements
- Vendor credit terms and outstanding balances
- Any pending judgments, liens, or claims
Legal Due Diligence
Legal due diligence protects you from inheriting undisclosed liabilities and ensures all contracts can transfer to you as the new owner.
Corporate Documents
- Articles of incorporation/organization
- Operating agreement or bylaws
- Shareholder agreements
- Certificate of good standing (from Secretary of State)
- Business licenses and permits
Contracts and Agreements
- Customer contracts (especially long-term agreements)
- Vendor/supplier agreements
- Service agreements and subscriptions
- Distribution or exclusivity agreements
- Non-compete/non-solicitation agreements
Pay close attention to “change of control” clauses in contracts. Some agreements automatically terminate or require consent when ownership changes. Identify these early so you can obtain necessary approvals before closing.
Litigation and Claims
- Pending lawsuits (as plaintiff or defendant)
- Past litigation history and outcomes
- Insurance claims history
- Regulatory actions or investigations
- OSHA violations or workplace complaints
Intellectual Property
- Trademark registrations and applications
- Patents (if applicable)
- Copyrights
- Trade secrets documentation
- Website domain ownership verification
Operational Due Diligence
Understanding how the business actually operates day-to-day helps you assess whether you can run it successfully and identify potential improvements.
Business Operations
- Organizational chart
- Standard operating procedures (SOPs)
- Quality control processes
- Technology systems and software licenses
- Vendor relationships and dependencies
Industry and Market
- Competitive analysis
- Market trends and outlook
- Industry regulations and compliance requirements
- Technology disruption risks
Seller Transition
- Seller’s proposed transition plan
- Training period arrangements (typically 2-4 weeks)
- Non-compete agreement terms (geography, duration, scope)
- Post-closing consulting agreement (if any)
Customer Due Diligence
Customer concentration is one of the biggest risk factors SBA lenders evaluate. A business overly dependent on one or two customers is risky if those relationships don’t survive the ownership transition.
Customer Concentration
- Top 10 customers by revenue (percentage of total)
- Customer concentration risk assessment
- Length of customer relationships
- Contract renewal dates and terms
If any single customer represents more than 20% of revenue, SBA lenders will scrutinize the deal closely. More than 40% concentration may require additional mitigation measures or could jeopardize loan approval entirely.
Customer Quality
- Customer retention rates (year over year)
- Customer satisfaction data or reviews
- Net promoter score (if available)
- Customer complaint history and resolution
Customer Interviews
- References from key customers (with seller permission)
- Likelihood of continued business under new ownership
- Any concerns or planned changes to the relationship
Employee Due Diligence
Employees are often the most valuable asset in a service business. Understanding who stays, who’s critical, and what obligations exist is essential.
Workforce Overview
- Employee roster with positions and tenure
- Organizational chart
- Compensation schedules (salaries, bonuses, benefits)
- Employment agreements and offer letters
Key Employees
- Identification of critical employees
- Retention risk assessment
- Non-compete agreements in place
- Succession planning documentation
Consider meeting key employees before closing (with seller’s permission). Their reaction to the ownership change—and their likelihood of staying—can significantly impact the business’s value and your transition success.
HR Compliance
- Employee handbook
- Workplace safety compliance (OSHA)
- Pending HR claims or disputes
- Workers’ compensation history and claims
Benefits and Obligations
- Health insurance details and costs
- Retirement plans (401k, pension obligations)
- Accrued vacation/PTO liabilities
- Union contracts (if applicable)
Asset Due Diligence
For asset purchases (the most common SBA acquisition structure), you need to verify what you’re actually buying and its condition.
Equipment and Fixtures
- Complete equipment list with ages and estimated values
- Maintenance records
- Physical condition assessment
- Pending replacement needs (and estimated costs)
- Leased vs. owned equipment (verify lease terms)
Inventory
- Current inventory valuation
- Slow-moving or obsolete inventory identification
- Inventory turnover rates
- Inventory valuation method (FIFO, LIFO, average cost)
Vehicles
- Vehicle list with titles
- Mileage and condition
- Insurance coverage
- Lease agreements (if applicable)
Real Estate Due Diligence
Whether the business leases or owns its location, real estate due diligence is critical. Location problems can be difficult or impossible to fix after closing.
Leased Property
- Current lease agreement (full document)
- Remaining term and renewal options
- Rent escalation schedule
- Assignment/transfer provisions
- Landlord contact information and relationship
SBA lenders typically require the lease term (including renewal options) to extend at least as long as the loan term—usually 10 years. If the current lease is shorter, you may need to negotiate an extension before closing.
Owned Property
- Title report and title insurance
- Property tax records
- Zoning verification
- Property condition assessment
- Environmental reports (Phase I, and Phase II if needed)
Location Analysis
- Location suitability for business operations
- Foot traffic and accessibility
- Parking adequacy
- Nearby competition
What Your SBA Lender Needs
Your SBA lender will require much of the documentation you collect during due diligence. Here’s what they’ll specifically need:
Documents Lenders Require
| Document | Purpose | Critical? |
|---|---|---|
| 3 years business tax returns | Verify historical earnings | Yes |
| Financial statements (P&L, balance sheet) | Assess current financial health | Yes |
| Purchase agreement | Understand deal terms | Yes |
| Asset allocation | Determine collateral value | Yes |
| Lease agreement | Verify location stability | Yes |
| Customer concentration data | Assess revenue risk | Yes |
| AR/AP aging reports | Evaluate working capital needs | Helpful |
| Equipment list | Verify asset values | Helpful |
Working with an SBA loan broker streamlines this process. Brokers know exactly what each lender needs and can help you organize documents efficiently, preventing back-and-forth delays during underwriting.
Due Diligence Timeline
A well-organized due diligence process keeps your acquisition on track. Here’s a typical 6-week schedule:
| Week | Focus Area | Key Activities |
|---|---|---|
| Week 1-2 | Financial Documents | Collect tax returns, P&L, balance sheets; begin SBA application |
| Week 2-3 | Financial Analysis | Deep dive into financials; verify revenue with bank statements; legal review begins |
| Week 3-4 | Operations & Employees | Review operations; assess key employees; understand day-to-day workflow |
| Week 4-5 | Customers & Assets | Customer concentration analysis; asset inspection; site visits |
| Week 5-6 | Final Review | Address open questions; renegotiate if needed; finalize purchase agreement |
Tips for Efficiency
- Create a shared folder: Use Google Drive or Dropbox for organized document exchange
- Send organized requests: Batch your document requests by category rather than piecemeal
- Follow up promptly: Don’t let missing items delay the process
- Document everything: Keep written records of all discussions and findings
- Engage professionals early: Hire your attorney and CPA at LOI signing, not later
Thorough due diligence protects your investment and satisfies your lender’s requirements. Don’t rush this process, but don’t let it drag on either. Run your SBA financing in parallel, stay organized, and engage professionals to help you evaluate what you find. The time you invest in due diligence pays dividends in avoided surprises after closing.
Frequently Asked Questions
Most business acquisition due diligence periods are 30-60 days. The timeline depends on the business’s complexity, how organized the seller’s records are, and how quickly both parties respond to requests. Simple businesses with clean books can be reviewed in 30 days; complex operations may need the full 60 days.
Minor issues are normal and can often be addressed through price adjustments or specific representations in the purchase agreement. Major issues—like undisclosed liabilities, significant customer concentration, or fraudulent financials—may warrant walking away. Your LOI should specify your right to terminate if due diligence reveals material problems.
Yes, strongly recommended. A lawyer reviews contracts, identifies legal risks, and drafts/reviews your purchase agreement. A CPA verifies financials, analyzes tax implications, and helps you understand the true earnings of the business. The cost of these professionals is minimal compared to the risk of missing something important.
Yes, and you should. Start your SBA application as soon as you sign the LOI. Share documents with your lender as you receive them during due diligence. Running both processes in parallel can save 2-4 weeks on your overall timeline to closing.
Relying on seller-provided financials without independent verification. Always verify revenue through bank statements, not just P&L reports. Also common: underestimating working capital needs, not understanding customer concentration risk, and failing to meet key employees before closing.
