What Should You Request Before Spending Money on Due Diligence?

# What Should You Request Before Spending Money on Due Diligence?

Full due diligence can involve accountants, attorneys, lenders, inspectors, technology specialists, environmental professionals, and industry experts.

Those people are useful. They also send invoices.

Before launching the expensive phase, ask for enough information to decide whether the opportunity deserves it.

This is a preliminary screening request, not a complete due-diligence checklist.

Start with the financial package

Request:

• Three years of federal business tax returns
• Three years of year-end profit-and-loss statements and balance sheets
• Current year-to-date profit-and-loss statement and balance sheet
• Monthly revenue and profit detail for at least the current and prior year
• The seller’s detailed SDE calculation for each year
• A list of every proposed add-back with supporting documentation
• Accounts-receivable and accounts-payable aging reports, when relevant
• Inventory summary and valuation method, when relevant
• Capital-expenditure and major repair history

The purpose is to compare records, not admire them individually.

Do tax-return revenue and internal financial statements agree? Do monthly trends support the annual total? Does the SDE worksheet begin with the same profit shown in the records? Are margins changing?

Material differences need explanations and evidence.

Ask what is included in the price

Request a preliminary list of:

• Equipment, vehicles, furniture, and fixtures
• Inventory
• Intellectual property, domains, phone numbers, and software accounts
• Customer contracts and deposits
• Licenses and permits
• Real estate or leasehold rights
• Excluded cash, receivables, liabilities, or personal assets

“Business included” is not a sufficiently detailed asset list.

Find out whether equipment is owned, leased, financed, or subject to a lien. A shiny truck in the parking lot may belong to the bank, the seller personally, or somebody who would like it back on Tuesday.

Understand customers and revenue

Request information showing:

• Revenue by month
• Revenue by major customer or customer group
• Recurring, repeat, project, and one-time revenue
• Refunds, chargebacks, discounts, and customer credits
• Customer retention or churn, when relevant
• Contract terms, renewal dates, and change-of-control provisions

Customer names may remain masked during early review. You can still learn whether one customer represents 35% of sales or whether half of annual revenue came from a single project.

Understand what the owner actually does

Ask for:

• The owner’s typical weekly responsibilities and hours
• Employee roster, roles, tenure, compensation, and benefits
• Open positions and contractor relationships
• Family members working in the business
• Key licenses, certifications, or customer relationships tied to individuals
• An organizational chart, even if the “chart” is three boxes and the owner’s name appears in all of them

The purpose is to identify what labor is embedded in SDE and what must be replaced after closing.

Review the location and lease early

For a location-dependent business, request:

• Current lease and amendments
• Remaining term and renewal options
• Rent schedule and additional occupancy costs
• Assignment and change-of-control requirements
• Personal guarantees
• Landlord contact and consent requirements
• Property ownership information if real estate is included

A wonderful restaurant with a nontransferable lease is not the same opportunity. Neither is a car wash whose property is excluded from the advertised price.

Ask about obligations and problems

Request a summary of:

• Loans, liens, equipment financing, and leases
• Pending or threatened litigation
• Tax notices or payment plans
• Insurance claims
• Regulatory, licensing, safety, or environmental matters
• Customer disputes and warranty obligations
• Data-security incidents
• Related-party transactions

This does not replace searches, legal review, or verification. It helps identify whether obvious issues exist before you commit more time and money.

Ask for operating evidence specific to the business

The right source records depend on what creates revenue.

Examples:

• Restaurant: point-of-sale reports, delivery-platform statements, food and labor cost trends
• Laundromat: card-system records, collection logs, machine list, utility history
• Home services: dispatch records, service agreements, technician productivity, fleet records
• Ecommerce: store analytics, payment-processor reports, ad-platform results, returns, supplier terms
• Subscription software: recurring revenue schedules, customer cohorts, churn, contracts, hosting costs

Tax returns show the financial summary. They do not explain every operational risk.

Look for consistency before completeness

During preliminary screening, you may not receive every requested document. Confidentiality, customer privacy, timing, and deal stage can limit disclosure.

Pay attention to:

• Whether the seller responds clearly
• Whether documents reconcile
• Whether important records exist
• Whether explanations remain consistent
• Whether missing information has a reasonable path to verification

“You can see everything after you make a nonrefundable deposit” deserves careful professional review before you agree.

When to bring in professionals

If the initial package supports continued interest, engage the right advisers before signing binding commitments or waiving conditions.

The professional team may include an acquisition attorney, CPA, lender, insurance adviser, and specialists for real estate, equipment, environmental, technology, licensing, or the particular industry.

Give each adviser a defined scope. “Please look this over” is less useful than “reconcile revenue and SDE for three years, test these add-backs, and identify cash-flow adjustments.”

Deciding whether to go deeper

Before paying for full diligence, ask for enough evidence to answer four questions:

1. Do the reported earnings reconcile to credible records?
2. What exactly is being sold?
3. What must continue after the owner leaves?
4. Is there any obvious reason to stop now?

You are not trying to complete diligence for free. You are deciding whether this business has earned the next level of investigation.

Sources and further reading

• SBA: Planning and financial-information guidance
• IRS: Asset acquisition reporting and purchase-price allocation
• Acquisition Quest Buying Guides by business type

Acquisition Quest note: Required diligence varies materially by business, transaction structure, location, and risk. This screening list does not replace legal, financial, tax, property, environmental, technical, or industry-specific review.