Due Diligence Document Preparation Checklist

Buyers need the original formation documents to confirm entity type, state of formation, and authorized shares. Missing articles can delay closing by weeks.

These govern how the entity is managed, how decisions are made, and who has authority to approve a sale. Outdated versions create ambiguity about selling authority.

Buyers review these for right of first refusal, drag-along/tag-along rights, and any restrictions on transfer that could block the deal.

Minutes document major decisions — executive compensation, debt, distributions, related-party transactions. Gaps suggest the company operates informally, which raises governance concerns.

This proves who owns what. Buyers will not close without a clean capitalization table showing every issuance, transfer, and cancellation.

These confirm that franchise taxes are current and the entity is authorized to do business. Expired status can void contracts and create personal liability.

Buyers need to understand the full corporate structure to identify what they are — and are not — acquiring, and to flag intercompany transactions that need unwinding.

Industry-specific licenses (contractor, healthcare, food service, financial) may not transfer automatically. Identify which require new applications post-closing and start early.

Buyers price litigation risk into their offers. Undisclosed lawsuits discovered in due diligence destroy trust and often kill deals outright.

If the business operates under any name other than its legal entity name, those registrations must be documented and transferable.

Tax returns are the "ground truth" that buyers compare against your financials. Discrepancies between tax returns and internal P&Ls trigger deeper scrutiny.

Audited statements carry the most credibility. If you only have internally prepared financials, consider a Quality of Earnings report to bridge the gap.

Buyers analyze monthly trends for seasonality, one-time events, and trajectory. Lump-sum quarterly reports are not sufficient.

Every line item on the balance sheet must be supported — fixed assets, prepaid expenses, accrued liabilities, deferred revenue. Unsupported balances become negotiating points.

Stale receivables over 90 days are often excluded from working capital calculations. Clean AR directly impacts your net proceeds.

Buyers will check for unrecorded liabilities — vendor invoices in the drawer, accrued bonuses, unreported sales tax. Surprises here erode trust.

Every obligation must be listed with balance, terms, interest rate, maturity, and whether it contains a change-of-control provision requiring payoff at closing.

Buyers distinguish between maintenance capex (required to sustain operations) and growth capex. Deferred maintenance reduces valuation.

Projections must be defensible and tied to specific assumptions. Overly optimistic forecasts backfire when buyers test the underlying logic.

Bank statements verify cash flow and catch off-book transactions. The chart of accounts shows how consistently the business categorizes expenses.

Buyers evaluate contract duration, auto-renewal clauses, termination rights, and assignment provisions. Contracts that terminate on change of control are a serious risk.

Key supplier relationships with favorable pricing are an asset. Buyers need to confirm these terms survive the transaction.

Lease terms, remaining duration, renewal options, and landlord consent requirements directly impact valuation. Short leases or above-market rents reduce what buyers will pay.

Buyers review compensation commitments, non-compete enforceability (limited in California), and misclassification risk between employees and contractors.

NDAs protect trade secrets during and after the sale. Existing non-competes with former employees or partners must be catalogued for the buyer.

Buyers verify adequate coverage and check claims history. Gaps in coverage or frequent claims signal operational risk.

Every credit relationship must be disclosed. Personal guarantees typically need to be released at closing, which requires lender cooperation.

If employees or contractors created intellectual property, written assignments must exist. Without them, the IP may not belong to the company — a deal-breaker for buyers.

Buyers calculate total compensation burden and compare to market rates. Underpaid key employees are a flight risk; overpaid employees become a post-close cost issue.

Buyers need to understand the full cost of benefits and any commitments that survive the sale. Unfunded pension or deferred compensation obligations are deal complications.

This reveals management depth, span of control, and where the owner sits in daily operations. A flat org chart with everything reporting to the owner signals transition risk.

SOPs for sales, fulfillment, customer service, finance, and HR prove the business is systemized. Buyers pay more for businesses that run on process rather than personality.

California has unique employment requirements — meal/rest breaks, expense reimbursement, pay transparency. An outdated handbook creates compliance liability for the buyer.

Buyers often require the seller to fund retention bonuses for critical employees. Having a plan in place before negotiations shows preparedness and protects value.

CBA obligations transfer to the buyer and may restrict post-close operational changes. Buyers need to review these well before making an offer.

Frequent claims or open claims affect insurance costs and signal workplace safety issues. Buyers review the experience modification rate (EMR) as part of risk assessment.

Buyers cross-reference returns against financial statements. Amended returns, late filings, or audit history require explanation and documentation.

Unreported sales tax nexus is one of the most common hidden liabilities discovered in due diligence. Multi-state sellers are especially at risk.

Buyers verify that property taxes are current and that assessed values are reasonable. Underpayment or disputes create closing complications.

Payroll tax compliance is a priority liability — it can pierce the corporate veil and create personal liability for responsible parties, including buyers in asset deals.

FDA, OSHA, EPA, state licensing boards — any regulatory body that governs your industry. Outstanding violations or consent orders must be disclosed.

Required for any transaction involving real property or businesses in manufacturing, chemicals, or waste. Environmental remediation costs can exceed the business value.

California requires annual filings and an $800 minimum franchise tax. Delinquent status can result in entity suspension, which prevents the company from prosecuting or defending legal actions.

Registered IP must be in the entity name (not the founder) and maintenance fees must be current. Lapsed registrations may be unrecoverable.

Every online property the business uses must be listed with registrar information and ownership credentials. Domains registered to a founder personally need to be transferred.

Buyers evaluate transferability, renewal costs, and open-source license obligations. Restrictive licenses (GPL) in proprietary code can be a significant issue.

Formulas, algorithms, processes, and know-how that give the business a competitive edge. These must be documented well enough that they survive an ownership transition.

California Consumer Privacy Act compliance is mandatory for businesses meeting revenue or data thresholds. Non-compliance creates regulatory risk that buyers inherit.

Buyers need to understand the technology stack, ongoing costs, and resilience. Undocumented systems create transition risk and potential hidden costs.