Financial Due Diligence Checklist for Buying a Small Business

Financial due diligence on a small business tests whether the earnings in the CIM are real and whether they are likely to continue under a new owner. A working checklist covers six areas: revenue against bank deposits, the books against filed tax returns, add-backs against documents, customers, working capital, and the questions still open at the end. The documents come first, but the checklist is about what gets tested with them.

This article covers the tests. The documents a QoE provider asks for, and why, are listed in what to have ready before a quality of earnings engagement starts.

What should the checklist cover?

A checklist that stops at collecting documents misses the point. A folder of bank statements is not a test until the deposits are compared to something.

Does the revenue tie to the bank and the tax returns?

Start here. Most of what comes later builds on revenue. If revenue is wrong, the add-backs, the margins and the multiple are wrong with it.

Proof of cash takes total deposits off the bank statements, month by month, and removes the deposits that are not revenue: loan proceeds, owner contributions, transfers between accounts, refunds. What is left is compared to reported revenue. The checklist items:

• Are all operating accounts included, not just the main one?
• Do card sales show up in the merchant processor statements and then in the bank?
• Are differences listed by month, rather than netted into one total?

The tax return check ties the books to three years of filed returns and to IRS transcript data. The transcript shows whether the returns provided are the returns that were filed. Differences between book income and taxable income are common and often ordinary, such as depreciation methods or expenses that are only partly deductible. They should be listed line by line, so a buyer can see which ones touch earnings and which ones do not.

If a figure cannot be tied to a source document, the finding should say so plainly. An estimate in that spot hides the question a buyer most needs to ask.

Which add-backs have documents behind them?

Add-backs are expenses the CIM says will not continue under a new owner: owner pay above market, personal expenses run through the business, one-time costs. They move the price directly, because the multiple applies to them. The checklist items:

• Does an invoice, statement or payroll record support it?
• Will the expense stop after closing, or will someone have to be paid to do that work?
• Did the same cost show up in prior years under a different name?

Adjustments can run the other way too. If the owner fills a role today without market pay, a new owner may have to hire for it. More on this in which add-backs survive diligence.

Then set the tested figures next to the CIM. An illustration with round numbers: a CIM shows $800,000 of SDE, and the price is 3 times that, or $2,400,000. Testing finds $50,000 of add-backs with nothing behind them beyond the owner's description. Tested SDE is $750,000. At the same multiple, that is $2,250,000, a $150,000 difference. Whether the multiple holds is a negotiation. The conversation is now about one specific item rather than a general doubt.

How much depends on a few customers?

Revenue broken out by customer shows how much of the business rests on a small number of accounts, and which customers came and went during the period. No single percentage settles it. It depends on the contracts, how long the relationships have run, and whether the relationship is with the company or with the owner personally.

Lenders commonly look hard at concentration, because losing one large customer after closing can change debt coverage quickly. The checklist items:

• What share of revenue comes from the largest customers, by year?
• Are there written contracts, and when do they renew?
• Did any large customer leave or shrink during the period?
• Is the owner the main contact for the largest accounts?

Trend and margin analysis sits next to this. Revenue, gross margin and operating expenses by month show direction and the reasons for it: a price increase, a lost contract, seasonality, a change in how costs are recorded. A margin that improves while sales fall is worth a question.

What does the business need on hand to keep running?

Working capital is receivables, inventory and work in progress, less payables, accrued payroll and deferred revenue. A buyer who takes over a business with too little of it may have to put in cash after closing just to cover payroll and suppliers. The checklist items:

• What level does the business normally run on, measured over the trailing twelve months?
• Does the purchase agreement say how much working capital is delivered at closing?
• On cash basis books, has inventory been counted, and are customer deposits for work not yet done identified?

The level is often negotiated into the purchase agreement, and the wording is for your attorney. See working capital in an SBA acquisition.

What happens to the items that cannot be answered?

Questions build up throughout the work: a deposit that does not match an invoice, an add-back with no support, a customer that disappeared. They go to the company in writing, and the answers are recorded next to the questions. Items without an answer stay on the list as open. For a buyer, that list is the record of what was asked, what was answered and what is still outstanding, and it is meant to be read in full.

The last two pieces look forward. A projection model built from the tested figures, not the CIM, shows how loan payments and slow months fit together. A risks and opportunities summary pulls the findings into the items that affect earnings after closing. Whether any of it changes the deal is the buyer's decision.

A quality of earnings report is one way to run this checklist start to finish. The ten procedures in a TAS report are listed on the quality of earnings page.

Common questions

Can I run this checklist myself?

Parts of it. A buyer with the bank statements and tax returns can compare annual deposits to reported revenue and read the returns. The harder parts are the monthly bank work, the IRS transcript comparison and documenting the add-backs. Lenders and capital partners also commonly want a third party to have done the work.

Is financial due diligence required for an SBA loan?

Under SBA SOP 50 10 8.1, effective October 1, 2026, Initial Acquisition and Business Expansion loans where the business purchase price is $3 million or more need a quality of earnings report from an independent financial professional engaged by and acting on behalf of the lender. The threshold is the price in the purchase agreement less owner-occupied real estate at appraised value. Partner or owner buyouts and ESOP or cooperative conversions are exempt. Below $3 million, the lender sets its own requirements. Confirm with your lender.

How long does it take?

At TAS, generally two to four weeks from receipt of documents. The company's response time sets most of the pace, which is why having the documents ready matters more than anything else on the timeline.

What does it cost?

Our fee is $7,500 flat for SBA-sized deals, whether or not SBA financing is used, with no hourly billing. Larger deals are scoped and priced to the work after a call, and the fee is quoted before work starts. An added fee applies when the company has no financial statements and they have to be built, or when the deal includes more than one business, quoted once the documents are in. Details are on the pricing page.