The Smart Buyer's Guide to SMB Acquisition Due Diligence

As a first-time small business buyer, I quickly discovered that due diligence can become one of the most expensive and time-consuming aspects of the acquisition process. After navigating this journey myself, I've developed a practical approach that balances thoroughness with cost-effectiveness—while maintaining positive seller relationships throughout.

Begin With Self-Directed Research Before Hiring Experts

Once my letter of intent was signed, I immediately began preliminary due diligence myself—examining documents, reviewing financial statements, identifying potential issues, and compiling questions.

I developed these skills by studying other acquisitions, participating in buyer communities like Contrarian Thinking, and using free resources such as Searchfunder. Reviewing others' deals provided valuable practice in spotting 🚩.

Obviously before starting our own community Acquire Weekly. Those were the best resources out there unfortunately.

Insider tip: Offer to help evaluate other people's potential acquisitions—it sharpens your analytical skills while building relationships you can leverage later.

Essential documents to request early (ideally before submitting your LOI):

• Confidential Information Memorandum

• Three years of tax documentation (might be tricky to get)

• Monthly profit and loss statements to understand seasonal patterns

• Customer-specific sales data to identify concentration risks in B2B businesses

Evaluate Multiple Due Diligence Providers

While conducting my initial assessment, I spent a week interviewing more than ten legal and financial due diligence providers. The differences in cost, thoroughness, and communication styles were remarkable.

Recommendation: Create a standardized interview guide to ensure you're comparing providers fairly and comprehensively.

Let us know if you want us to send over an additional document around this process.

Present a Detailed Scope of Work 🗄️

Approaching vendor discussions with a well-defined scope demonstrates your professionalism while helping secure better pricing. It signals that you've done your homework and value everyone's time.

Finding Quality Due Diligence Partners 👀

My most successful provider partnerships came through:

• DueDilio platform

• Community recommendations

• Direct referrals from other acquisition entrepreneurs (TillCFO proved exceptional)

We also have a bunch of other partners we’ve developed over the years that we can make direct introductions to.

Managing Seller Fatigue During Due Diligence 🫱🏽‍🫲🏼

Remember that deals often collapse not because of what's discovered, but how the investigation is conducted. Maintaining positive seller relationships throughout this demanding process is crucial.

Strategies that worked for me:

• Creating a shared document tracker for transparency

• Grouping information requests to avoid overwhelming the seller

• Conducting regular check-ins to maintain momentum

• Framing the process as collaborative rather than adversarial

Legal Due Diligence: Choosing Cost-Effective Options 💰

Legal due diligence typically follows one of three pricing structures:

• Fixed fee

• Hourly rates (with or without caps)

• Percentage of transaction value

For small business acquisitions, percentage-based pricing rarely delivers proportional value. While hourly billing offers transparency, the uncertainty can be challenging to manage.

I ultimately selected a flat-fee arrangement through an Advisor, which provided budget certainty and delivered excellent results. This may not always be the best option so please review your current options presented and work from there.

Our deals in our community are actually percentage of transaction value because its’ a market which that is severely underserved and provides us with a good opportunity to shine there.

Financial Due Diligence: Scaling to Your Needs 📈

A comprehensive Quality of Earnings analysis isn't always necessary for smaller transactions. Instead, I opted for a targeted review with Till CFO’s fractional CFO team, focusing on:

• Verification of tax returns against profit and loss statements

• Working capital analysis

• Revenue and banking reconciliation

• Key risk identification

SBA financing note: Remember that lenders will commission an independent valuation, providing additional financial verification.

The Often-Overlooked Importance of HR Due Diligence 🔎

For businesses with employees (particularly ten or more), specialized HR due diligence is valuable. I engaged Aspen HR for a focused review covering:

• Worker classification compliance

• Wage and hour practices

• Employment agreement and policy evaluation

Legal teams may not catch industry-specific HR issues that specialists will identify.

Insurance Due Diligence: Essential for SBA Financing

SBA lenders require insurance coverage before funding. Contact your lender early for specific requirements to avoid last-minute complications.

For straightforward acquisitions, SimplyBusiness.com offers efficient quoting, while insurance brokers can conduct comprehensive audits.

If you want a direct intro here then please email us.

Specialized Due Diligence: Worth the Investment

The budget saved by foregoing a full Quality of Earnings report allowed me to invest in industry benchmarking through Punctuation, which proved invaluable for my marketing agency acquisition.

Other specialized services to consider based on your target business:

• Operational processes review

• Sales pipeline assessment

• Technology stack evaluation (particularly for software companies)

Final Advice: Verify Your Advisors

Always research your due diligence providers thoroughly. What sounds impressive during initial conversations may hide concerning history—a brief background check can save significant headaches later.

I hope this comprehensive guide helps fellow business buyers navigate the due diligence process more effectively, saving time and money while improving outcomes.

If you’re looking to join our community of paid members then please feel free to find more information here.