Due diligence checklist for first-time buyers

Due diligence is the stage where a buyer moves from a general impression of a business to a detailed, evidence-based understanding of what they are actually agreeing to purchase. For a first-time buyer, knowing roughly what to ask for, and in what order, makes the process considerably less overwhelming, and the categories below are a reasonable starting point for most small business acquisitions, though the specific documents and questions that matter most will vary by industry and by the size of the deal.

Financial due diligence

• Two to three years of historical financial statements, plus current-year interim statements
• Tax filings and, where relevant, GST/HST filings, checked against what the financial statements report
• A normalized earnings summary showing seller's discretionary earnings or EBITDA after add-backs, along with an explanation of what was added back and why
• Accounts receivable and accounts payable aging, to understand how quickly customers pay and how the business manages its own bills
• Any outstanding loans, leases, or liens against business assets

Operational and legal due diligence

• Lease terms, including remaining length, renewal options, and any change-of-control clauses
• Key contracts with customers or suppliers, including how concentrated revenue is among a small number of accounts
• Equipment and vehicle condition, age, and any financing still attached to them
• Employee headcount, roles, wages, and which staff are expected to stay on after closing
• How much of day-to-day operations depend on the current owner personally
• Business licensing, permits, and any provincial certification requirements specific to the industry
• Pending or past litigation, and any workers' compensation or safety compliance history
• Corporate records, including whether the business is being sold as an asset sale or a share sale, which affects what liabilities transfer with it
• Insurance coverage currently in place

Financial due diligence is generally the right starting point, since if the underlying numbers do not hold up, there is little reason to spend time and legal fees on the operational and legal review that follows, though a lawyer will often run a parallel review of corporate records and contracts earlier than this suggests, particularly once a letter of intent is signed. Very few first-time buyers work through all of this alone: most bring in an accountant early and a lawyer at least by the time a letter of intent is signed, sometimes earlier for anything beyond a very small transaction. Due diligence tends to raise as many follow-up questions as it answers, which is normal, and it also helps to agree upfront, in the letter of intent or engagement terms, roughly how findings will be handled, whether they might lead to a price adjustment, a holdback, or specific warranties in the purchase agreement. What due diligence turns up rarely kills a deal outright on its own; more often it becomes the basis for one of those adjustments, which is one more reason to work through the categories above methodically rather than rushing toward closing. Treating this checklist as a starting point rather than a complete substitute for professional advice is the safest way to use it.