How to Prepare for Due Diligence — and Protect the Value of Your Deal

Accepting an offer to sell your business is an exciting milestone — but it’s also the beginning of one of the most critical phases of the entire transaction: due diligence.

During this stage, the buyer and their advisors will thoroughly examine every part of the business — financials, legal structure, operations, tax history, HR, contracts, liabilities, and more — to validate that what they’ve seen matches reality. If issues arise or information is incomplete, it can cause delays, trigger price renegotiation, or even result in a failed deal.

Many sellers underestimate this phase, assuming that if the business has been run well, diligence will be a simple review. In reality, most first-time sellers find it to be one of the most time-consuming and demanding parts of the process. Being well prepared before going to market is the best way to ensure a smooth diligence period, preserve deal value, and increase the likelihood of a successful closing.

Here are practical steps you can take to prepare:

1. Clean Up Financials

Buyers will perform an in-depth review of your financials, and any inconsistencies or gaps can quickly erode trust. Start by ensuring that financial statements are complete, accurate, and consistently prepared over time. All statements should reconcile to tax returns, with clear explanations for any material variances or one-time adjustments.

If your financials haven’t been reviewed externally in recent years, talk to your CPA about a review or audit. Buyers often engage third-party firms for a Quality of Earnings (QoE) analysis, so the cleaner and more organized your books are, the faster and more smoothly this step will go [Read more about the power of clean financial statements].

It’s also a good idea to review historical trends and performance — be prepared to explain any periods of weaker results or margin fluctuation, and to discuss key revenue drivers and customer concentration.

2. Organize Corporate and Legal Documents

One of the first things buyers will request is your corporate governance and legal documentation. If these records are disorganized or incomplete, it can raise concerns about attention to detail — or worse, lead to legal uncertainty.

Be ready to provide:

• Articles of incorporation and bylaws
• Operating or shareholder agreements
• Board and shareholder minutes
• Current licenses and permits
• Major customer and vendor contracts
• Debt and lease agreements
• IP registrations (trademarks, patents, copyrights)
• Insurance policies
• Litigation history and settlement documentation

Take time to review these records and address gaps now — expired permits, unsigned contracts, or missing records are much easier to fix before a buyer asks about them. Pay special attention to contracts that may contain change-of-control clauses or renewal dates that could impact the buyer’s plans post-close.

3. Review Tax Records

Buyers will want a clear, comprehensive view of your company’s tax history — not just income taxes, but sales and use taxes, payroll taxes, property taxes, and any other obligations at the federal, state, and local levels. You should be prepared to provide complete returns and supporting documentation for the past three to five years across all applicable tax types.

Work with your CPA to proactively identify and resolve any potential exposures, such as unpaid sales tax, nexus issues in multiple states, unfiled returns, misclassified expenses, or payroll tax compliance problems. Buyers will also want to understand your current tax position, including the treatment of NOL carryforwards, tax credits, or deferred tax liabilities.

If you are aware of any pending tax audits or disputes — even at the local or employment tax level — it is far better to address and explain these upfront. Tax issues that surface late in diligence can cause deal friction and materially impact terms.

4. Prepare HR and Employment Materials

Employment-related risks are always a focus area in diligence, particularly in industries with complex labor or benefit structures — and especially for businesses located in states with aggressive labor enforcement, such as California, New York, Massachusetts, or Illinois.

You should ensure that all employee records are complete, accurate, and up to date. In addition to a comprehensive employee list with compensation, benefits, and tenure, you should be prepared to provide:

• Signed employment agreements, NDAs, and non-competes (where applicable)
• Payroll records and wage/hour compliance documentation
• HR policies and employee handbook
• Benefits plan details (health, retirement, incentive comp, etc.)
• Employment tax filings (federal, state, and local)
• Records of any past or pending employment-related claims or litigation

Buyers will also evaluate organizational structure and key roles. Having an accurate org chart and clear documentation of responsibilities helps demonstrate operational stability. If the business is particularly reliant on key individuals, you should be prepared to discuss retention plans and any incentives to maintain continuity post-close.

Labor laws vary dramatically by state — and in more complex jurisdictions, buyers will apply extra scrutiny. Proactively addressing wage/hour compliance, proper employee classification, and other employment law risks before diligence begins can help you avoid delays and protect deal value.

5. Document Operations

Buyers want to gain confidence that the business will continue performing after the transaction — with or without the current owner. Well-documented operations go a long way toward building that confidence.

Prepare summaries of key business processes, production or service workflows, supply chain management, inventory controls, and quality assurance programs. Also document your IT systems and software platforms, especially if they are essential to operations or customer interactions.

If institutional knowledge is heavily concentrated in a small number of employees — or worse, in the owner’s head — begin capturing that information now. Buyers want to see that the business is not entirely dependent on any one individual to function smoothly.

6. Identify Liabilities

Transparency around liabilities is critical. If liabilities surface late in diligence or appear understated, it can undermine trust and lead to renegotiation or worse. You should prepare a full and accurate inventory of all known liabilities, including:

• Debt obligations and lease commitments
• Guarantees and warranties
• Pending or potential legal claims
• Environmental risks or obligations
• Off-balance-sheet liabilities
• Employee-related obligations (severance, deferred compensation)

Your M&A advisor can help you review this list and flag any areas that may need clarification or legal support. It’s always better to proactively disclose and explain liabilities than to let a buyer discover them independently.

7. Maintain Performance During Diligence

Finally — and critically — don’t lose sight of running the business while due diligence is underway. Buyers will continue to monitor performance throughout this period and into closing.

Sellers sometimes become distracted by the demands of diligence, which can lead to weaker results at precisely the wrong time. Sales trends, margins, and customer retention during this period all affect buyer confidence and can even lead to adjustments in purchase price or deal terms if performance dips.

Avoid making major business changes during diligence (such as new hires, new debt, or major contract changes) without first consulting your advisors. Stability and consistent results are key to preserving deal value and closing on favorable terms.

The Role of Your M&A Advisor

An experienced M&A advisor plays a crucial role in helping you navigate due diligence. Your advisor will guide you through preparation before going to market, help manage the flow of information to buyers, coordinate responses to diligence requests, and ensure that issues are addressed proactively.

Just as important, your advisor helps keep you focused on running the business — which is exactly where your attention needs to be during this phase. The more prepared you are, and the more organized the process, the higher your likelihood of protecting value and getting the deal done.

Final Thoughts

Due diligence can be one of the most challenging parts of a sale process — but it doesn’t have to be overwhelming. Sellers who prepare thoroughly, with the help of an experienced M&A advisor, can move through this phase with confidence, protect their deal value, and significantly improve their chances of a successful closing.

By taking the steps outlined here, you’ll not only help the buyer gain trust in your business — you’ll help yourself achieve a smoother, more efficient, and ultimately more rewarding transaction.