Most sellers think due diligence is about confirming the revenue number. It's not. By the time a buyer gets to diligence, they already believe the revenue is real. What they're doing is looking for reasons to walk away — or reasons to renegotiate the price.
I've been on the buyer's side. I've run due diligence on businesses where everything looked fine in the deck and fell apart in the data room. Here's what actually gets examined, and why so many sellers are blindsided by what kills their deal.
Financial statements — deeper than you think
Buyers and their accountants aren't just checking that your P&L matches your bank statements. They're reconstructing your true owner earnings — what's called Seller's Discretionary Earnings (SDE). They're looking at every add-back you've claimed and deciding whether they believe it.
They're also checking: Are expenses consistent year-over-year, or did costs mysteriously drop in your best year? Are there personal expenses running through the business? Are there related-party transactions that wouldn't exist post-close?
If your books don't hold up to that kind of scrutiny, the deal either reprices or dies. Not maybe — reliably.
Customer concentration
If any one customer represents more than 15–20% of your revenue, sophisticated buyers will flag it. If your top three customers represent more than 50%, you have a serious problem. The question they're asking: what happens to this business if that customer leaves?
This isn't just a price negotiation issue. SBA lenders look at customer concentration as a credit risk. If the numbers are bad enough, they won't approve the loan — which eliminates a significant portion of your buyer pool.
Key employee risk
Who in your business, other than you, would be difficult to replace? Every buyer is thinking about this. If the answer is "my operations manager who's been here 12 years and makes most of the daily decisions," that's a real risk — especially if they don't have an employment agreement or non-compete in place.
Key employees who aren't locked in, financially motivated to stay post-close, or replaceable with reasonable effort represent deal risk. Buyers either price it in or walk.
Legal and compliance issues
Tax liens, unpaid payroll taxes, unresolved disputes, missing business licenses — all of these surface in due diligence. So do 1099 classification issues, if you've been treating employees as contractors. SBA lenders in particular will require a clean tax transcript before they approve financing.
These aren't deal-killers if they're disclosed and addressed early. They become deal-killers when buyers discover them in the data room and wonder what else you didn't mention.
Contracts and transferability
Do your key customer contracts transfer with a sale, or do they require customer consent? Does your lease transfer? Do your vendor agreements have change-of-control provisions that could trigger renegotiation?
Buyers — and their attorneys — will pull every major contract and look for assignment restrictions. If transferring the business requires approvals from your three biggest customers, your landlord, and two key vendors, that's not a clean close.
What you can do about it
The best thing a seller can do is run their own diligence before going to market. Pull the same things a buyer would pull — tax returns, financial statements, contracts, org charts — and look at them through the lens of someone trying to find problems.
The issues you find, you can fix. The ones you don't find, buyers will find for you — and they won't be generous about the implications.