The Thing About Buying a Business
Acquiring a business is one of the most complex financial decisions a person or company can make. The seller knows their business intimately, including the parts they're hoping you don't look at too closely. Your job as a buyer is to close that information gap before you wire the money, not after.
Financial due diligence is the systematic process of verifying that what the seller says about their business is actually true — and surfacing the things they haven't mentioned.
The Financial Documents You Need
Request at minimum three years of: tax returns (business and, for small businesses, personal if the owner is key to operations), audited or reviewed financial statements if they exist, month-by-month profit and loss statements, balance sheets at each year-end, and cash flow statements.
Tax returns are particularly important because they're filed under penalty of perjury. If the income on the tax return doesn't match the income claimed in the sale presentation, that's either an error or fraud, and you need to know which.
Also request accounts receivable aging reports (who owes money and how old the debt is), accounts payable schedules, customer contracts and renewal history, employee agreements and compensation records, and a fixed asset schedule showing what equipment the business owns and its depreciation status.
The Numbers to Verify Independently
Revenue: Don't just accept the top-line number. Tie revenue to bank deposits. Ask for access to the payment processor or point-of-sale system to verify transaction history. Look at customer concentration — if 30% of revenue comes from one client, the business's value is closely tied to that relationship.
Recurring vs. one-time revenue: A business showing $2M in revenue that includes $400K from a one-time consulting contract this year has a normalized revenue base of $1.6M. Make sure you're valuing the right number.
Owner add-backs: Sellers typically "add back" personal expenses run through the business — car payments, travel, family salaries for non-working relatives. Scrutinize every add-back. Some are legitimate adjustments; others are optimistic or outright misleading.
Working capital: What working capital will be included in the sale? This matters enormously. If the business needs $300K in working capital to operate and the sale price assumes you'll provide your own, the effective purchase price is higher than the headline number.
Red Flags That Should Make You Pause
Customer concentration above 25% in any single client is a risk worth pricing in. Accounts receivable that are aging (lots of 60+ and 90+ day balances) suggests either collection problems or revenue that won't actually be collected. Revenue that's been growing dramatically in the 12 months before the sale — right when the owner decided to sell — deserves careful scrutiny. Employee turnover, especially of key people, in the period leading up to sale can signal internal problems the financials don't show.
Also pay attention to vendor relationships. Long-term supplier contracts that the seller has negotiated may not automatically transfer. A key supplier relationship that walks out with the founder is a cost that should be reflected in the price.
The Professional Help You Actually Need
Financial due diligence on a transaction above $500K warrants hiring a CPA with M&A experience to review the financials independently. They'll spot things an untrained eye misses — revenue recognition issues, hidden liabilities, inconsistent accounting treatment year over year.
An attorney handles legal due diligence (contracts, IP, litigation history), but the financial side belongs to a qualified accountant who can translate the numbers into plain-English findings before you commit.
The cost of professional due diligence is real. It's also a fraction of the cost of buying a business based on financials that turned out to be wrong.