Small-Business Acquisition Due Diligence: A Practical Checklist

Due diligence begins with hypotheses: customers are loyal, margins are real, employees will stay, assets work, obligations are known and the seller's role can transfer. Every request should test one of those hypotheses.

Before the full request

• Write your buy box, intended owner role and deal-breakers.
• Record the listing and seller claims separately from verified facts.
• Model preliminary normalized earnings and downside cases.
• Define specialist needs: transaction lawyer, accountant, valuator, lender, tax and industry experts.
• Agree confidentiality, access, timeline and decision gates.

Financial and tax

• Three to five years of financial statements, T2 returns and notices of assessment.
• Monthly year-to-date income statement, balance sheet and cash-flow detail.
• General ledger and support for every proposed add-back.
• Bank, merchant and sales records to corroborate reported revenue.
• Accounts receivable/payable aging, bad debts and deferred revenue.
• Inventory count, aging, costing method and obsolescence.
• Working-capital seasonality and required closing peg.
• Maintenance capital expenditure and deferred repairs.
• Debt, liens, guarantees, shareholder loans and related-party transactions.
• GST/HST, payroll, income-tax and provincial tax status.

Customers, market and suppliers

• Revenue, gross margin and retention by customer, service and channel.
• Top-customer concentration and change-of-control risk.
• Contracts, renewal dates, pricing rights and cancellation terms.
• Pipeline quality versus one-time backlog.
• Lost-customer list and reasons.
• Competitors, market changes and licensing barriers.
• Single-source suppliers, lead times, rebates and informal relationships.
• Reference calls structured with counsel and confidentiality needs.

Legal, assets and structure

• Corporate records, ownership, minute book and authorized shares.
• Material contracts, leases, permits, licences and insurance.
• Litigation, complaints, claims and regulatory correspondence.
• Asset register, serial numbers, condition and title.
• Intellectual property ownership, domains, software licences and contractor assignments.
• Privacy policies, consents, retention, breaches and data-processing vendors.
• Asset versus share purchase implications reviewed by Canadian tax and legal advisers.

People and owner dependence

• Employee/contractor roster, role, tenure, pay, vacation and benefits.
• Employment and contractor agreements, policies and disputes.
• Required licences, certifications and succession coverage.
• Key-person dependence and retention risks.
• Owner's weekly calendar and undocumented responsibilities.
• Family or related-party roles normalized to market.
• Culture, informal power and likely response to ownership change.

Technology and operations

• End-to-end process maps for lead-to-cash, purchase-to-pay and service delivery.
• System inventory, owners, contracts, renewal dates and export rights.
• Access-control list, administrator accounts and multi-factor authentication.
• Backups, restore tests, patching and incident response.
• Data ownership, quality, duplication and spreadsheet dependencies.
• Manual workarounds and single points of failure.
• Automation, custom code and integrations that depend on one person.

Transition and purchase agreement inputs

• Seller training hours, duration, deliverables and availability.
• Customer, employee and supplier communication sequence.
• Representations, warranties, indemnities and survival periods for counsel.
• Holdback, earn-out or seller-note terms tied to genuinely measurable risks.
• Closing working capital, inventory and cash/debt definitions.
• Day-one authority, banking, payroll, insurance and system-access plan.
• First-100-day priorities and changes deliberately deferred.

Turn findings into decisions

Classify every material finding:

• Accept: understood and priced.
• Mitigate before close: seller must cure or provide evidence.
• Structure: use holdback, seller note, working-capital adjustment or other counsel-designed protection.
• Reprice: normalized earnings or required investment changed.
• Walk: the risk cannot be responsibly transferred or compensated.

BDC describes diligence as a way to test expectations, surface red flags and confirm whether valuation and the letter of intent still make sense. In practice, that means verifying each important claim against source evidence, tailoring the checklist to the specific deal, and involving experienced transaction accountants and advisers where specialist judgment is required.

Organize diligence around claims to prove

“Customers are loyal” becomes retention by cohort, concentration, contract terms and lost-account history. “The team runs the business” becomes decision rights, schedules, compensation, tenure and a record of what happens when the owner is away. A document request without a claim attached creates a data room full of files and very little knowledge.

Use materiality and stop conditions

Decide in advance what changes price, structure or willingness to proceed. Examples include unsupported add-backs above 10% of claimed SDE, one customer representing more than the buyer's concentration limit, non-transferable licences, unpaid remittances or a seller unwilling to support ordinary verification. Stop conditions protect the buyer from explaining away each new problem because of money already spent.

This is a general starting checklist, not exhaustive diligence or legal, tax, accounting, valuation, privacy, employment, environmental or financing advice. Scope must fit the business and transaction.