Introduction: When Buyers Start Looking Under the Hood
You’ve received an offer to sell your business—congratulations. But before the deal negotiations really get off the ground, you’ll face one of the most important (and often misunderstood) stages of the M&A process: due diligence.
During this phase, the buyer’s lawyers, accountants, and advisors will “kick the tires” on your company—from contracts and compliance to taxes and intellectual property. Their goal? To confirm that what they’re buying matches what you’ve initially represented.
Handled well, due diligence builds trust, speeds up closing, and protects your valuation and purchase price. Handled poorly, it can delay or even derail your deal.
At Paracuellos Law Group, we help business owners turn diligence from a slog into an advantage. Here’s what buyers actually look for—and how to prepare so you stay in control.
What Is Legal Due Diligence—and Why It Matters
First, let’s set up some context for our discussion of due diligence and explore when due diligence occurs in the deal making process? In short, due diligence typically occurs right after a non-binding letter of intent (aka LOI, also sometimes called a term sheet) is signed by the parties.
In order to get an LOI done, you will have usually had initial conversations with the potential buyer about your business, you will have provided some initial financial information and you likely will have tentatively agreed on a purchase price.
Due diligence is the process by which the buyer confirms that this initially negotiated purchase price reflects the value of the business. Due diligence also helps the buyer learn all about how you have operated the business and what risks may be lurking under that shiny hood.
Due diligence comes right after the LOI and proceeds the time that the buyer provides the initial draft of a full purchase agreement. Due diligence is intended to confirm that the deal makes sense before additional time and legal fees are spent negotiating the full deal agreements.
In every sale, buyers perform three main types of diligence:
- Financial due diligence – to verify numbers, margins, and forecasts.
- Operational due diligence – to understand your systems, processes, and people.
- Legal due diligence – to confirm ownership, compliance, and risk.
While accountants focus on value, lawyers focus on risk. Their job is to find anything that could affect price, timing, or post-closing liability.
If a buyer finds problems during diligence, they may:
- Delay the transaction
- Request a price reduction
- Require additional indemnities or escrow holdbacks
- Or walk away altogether
The takeaway: The more organized and transparent your business is, the more confidence you inspire—and the smoother your deal will go.
What Do Buyers Check in Business Due Diligence?
The following checklist translates the legal due diligence process into plain English. It’s based on the same frameworks used by sophisticated M&A lawyers—but written for business owners preparing to sell.
1. Corporate Governance and Ownership
What buyers check:
- Articles of incorporation, bylaws, operating agreements
- Board and shareholder meeting minutes
- Organizational charts and ownership records
Why it matters:
Buyers must confirm the company exists legally, is in good standing, and that all decisions have been properly authorized. The buyer wants to know who has authority to agree to sell the company.
Red flags:
- Missing or outdated minutes
- Unfiled amendments
- Conflicting shareholder agreements
Tip: Keep your corporate book complete and up to date before going to market.
2. Capitalization and Securities
What buyers check:
- Stock ledgers, option grants, and ownership records
- Securities filings or exemptions
Why it matters:
Clean ownership records prevent disputes and confirm that shares were properly issued.
Red flags:
- Unclear share ownership records
- Unpaid or unauthorized shares
- Non-compliant sales of stock to investors
Tip: Ask your lawyer to review your cap table and ownership documentation for inconsistencies.
3. Material Contracts
What buyers check:
- Major customer and supplier agreements
- Vendor, lease, and loan contracts
- Licensing and partnership agreements
Why it matters:
Buyers need assurance that your key contracts will survive the sale and won’t trigger penalties.
Red flags:
- Change-of-control or termination clauses
- Informal “handshake” deals
- Contracts signed without authority
Tip: Identify any contracts requiring third-party consent early—it’s often the number one closing delay.
4. Intellectual Property (IP)
What buyers check:
- Patents, trademarks, copyrights
- Software code ownership
- NDAs and IP assignment agreements
Why it matters:
Buyers must confirm that your business—not former employees or contractors—owns the IP it relies on.
Red flags:
- Unassigned inventions
- Trademarks registered under an individual’s name
- Open-source code without documentation
Tip: Conduct an IP audit and verify ownership and registrations before diligence starts. If you have not previously required key consultants/developers to assign their work to your company, you can do that after the fact although you need to be careful to make sure you pay some “consideration” for the later-obtained assignment. Talk to your lawyer about how to do this effectively.
5. Employment and Benefits
What buyers check:
- Employee and contractor agreements
- Non-competes, NDAs, and offer letters
- Bonus, retention, and severance plans
- Compliance with applicable federal and state labor laws
Why it matters:
Labor issues and “key person” risks can impact both price and integration.
Red flags:
- Misclassified contractors (paying people via 1099 when they really should be treated as a W-2 employee)
- Missing documentation (such as I-9s)
- Promises of equity incentives without proper documentation
Tip: Prepare summaries of key roles and ensure offer letters or contracts reflect current compensation.
6. Litigation and Disputes
What buyers check:
- Active, pending, or threatened litigation
- Past claims or settlements
Why it matters:
Disputes—even small ones—signal risk and can trigger extra escrow requirements.
Red flags:
- Undisclosed claims
- Regulatory or employment actions
7. Tax, Financial, and Audit Matters
What buyers check:
- Tax returns, audits, and filings
- Liens, payment history, and correspondence
Why it matters:
Unpaid or disputed taxes can carry forward and impact post-closing value.
Red flags:
- Payroll tax issues
- Unfiled returns or inconsistencies
- Aggressive deductions unsupported by documentation
8. Real Estate and Leases
What buyers check:
- Property deeds, leases, and zoning permits
- Environmental reports
Why it matters:
Buyers verify that seller’s facilities can continue operating without interruption.
Red flags:
- Expired leases or missing landlord approvals
- Non-compliance with occupancy or zoning rules
Tip: Gather all real estate and environmental documents into one digital folder.
9. Environmental and Regulatory Compliance
What buyers check:
- Permits, licenses, and environmental records
- Compliance with data, safety, or industry-specific rules
Why it matters:
Regulatory or environmental violations can create expensive liabilities. Most permits and licenses are not transferrable to a buyer and so buyers need to prepare for closing by seeking new key permits and licenses.
Red flags:
- Expired permits
- Open enforcement actions or audits
Tip: A pre-sale compliance review can identify and fix issues before they appear in diligence and can educate your buyer so they can prepare timely to take over operations at closing.
10. Financing and Debt Obligations
What buyers check:
- Loan and credit agreements
- Security interests, UCC filings, and guarantees
Why it matters:
Debt obligations affect how the deal is structured and what can be repaid or assumed at closing.
Red flags:
- Undisclosed liens
- Personal guarantees
- Loan defaults or covenant breaches
Tip: Run a lien search early to catch any surprises.
11. Insurance and Risk Management
What buyers check:
- Policy certificates, claims history, and coverage limits
Why it matters:
Adequate insurance demonstrates sound management and reduces buyer concern.
Red flags:
- Lapsed coverage
- Missing or limited policies for key risks (e.g., cyber or product liability)
Tip: Renew and organize policies before diligence begins. Talk to your insurance broker about “tail” policies you can buy to protect you in case pre-sale liabilities come to light after closing that you are responsible for.
The Hidden Deal Killers
Even good businesses can lose deals during diligence. The most common culprits include:
- Messy records – missing board approvals or unsigned contracts
- Unassignable agreements – contracts that terminate upon sale
- Compliance gaps – expired permits or unfiled taxes
- Ownership disputes – inconsistent equity records
- Unresolved claims – pending litigation or unknown liabilities
Solution: Conduct your own seller-side due diligence six to twelve months before going to market. You’ll identify and fix issues before buyers find them—and that can save weeks of delay or hundreds of thousands in value (or more).
How to Prepare for Buyer Due Diligence
Follow this six-step approach to stay ahead of the buyer’s team:
- Conduct a legal audit – Have your attorney review your company against a standard due diligence checklist.
- Create a digital data room – Store corporate, contract, and compliance documents in an organized online folder.
- Coordinate with advisors – Ensure your lawyer, CPA, and broker align on financials and disclosures.
- Fix gaps early – Update filings, renew permits, and clean up corporate records.
- Control disclosure – Share information strategically with context and solutions.
- Document your story – Explain unusual items (like past disputes) upfront to build trust.
Case Study:
A family-owned manufacturer we advised hadn’t updated its board minutes in years. Before marketing the company, we helped them recreate a full, accurate corporate record. When the buyer’s lawyers asked for documentation, everything was ready—and the deal closed in six weeks with no price reduction.
Turning Diligence Into a Competitive Advantage
Most sellers see due diligence as a hassle. Smart sellers see it as leverage.
A well-prepared diligence package tells the buyer you’re organized, transparent, and trustworthy. That confidence translates into faster closings and stronger valuations.
At Paracuellos Law Group, we help business owners sell smart—using legal clarity and preparation to create smoother transactions and better outcomes.
Ready to Sell Smart? Let’s Talk.
If you’re planning to sell your business in the next 12–24 months, now is the time to prepare.
A Legal Readiness Review from Paracuellos Law Group can identify issues before they cost you leverage—or money—at the closing table.
Schedule a confidential consultation to discuss your exit timeline, identify gaps, and build a clear path to a smooth, profitable sale.
Contact Paracuellos Law Group | Learn More About Our M&A Services
Key Takeaway
Due diligence isn’t about catching mistakes—it’s about building trust.
The better prepared you are, the faster your deal moves, and the more value you keep.
Frequently Asked Questions About M&A Due Diligence
1. What documents do buyers typically request during business due diligence?
Buyers usually request corporate records (articles, bylaws, board minutes), ownership and equity details, material contracts, tax filings, financial statements, employee agreements, intellectual property registrations, and real estate or lease agreements.
In short, they want to confirm that your company legally owns its assets, operates compliantly, and has no hidden liabilities.
Tip: Having these materials organized in a secure digital “data room” before you start the sale process can significantly speed up closing.
2. How long does the M&A due diligence process take?
For mid-market businesses, legal due diligence typically lasts 4 to 8 weeks, depending on deal size, complexity, and how organized the seller is.
A well-prepared seller can often cut that time in half. The main delays usually come from incomplete documentation or waiting on third-party consents (like landlord or customer approvals).
3. What are the biggest red flags that can derail a deal during due diligence?
Common “deal killers” include:
- Unclear ownership or missing board approvals
- Key contracts that can’t be assigned to the buyer without consent of customers
- Unpaid taxes or regulatory violations
- Litigation or employment disputes not disclosed early
- Poor financial recordkeeping or inconsistent information
These issues can lead to price reductions, escrow holdbacks, or even deal termination—so it’s best to identify and fix them before a buyer does.
4. How can I prepare my business for due diligence before I decide to sell?
Start with a legal readiness review. Your lawyer can perform a seller-side audit that mirrors the buyer’s due diligence checklist. That means reviewing your corporate documents, contracts, licenses, and compliance history to uncover issues early.
Once the gaps are addressed, you’ll be in a stronger position to negotiate—and your sale process will run faster and smoother.
5. Why should I involve a lawyer early in the due diligence process?
Because diligence isn’t just paperwork—it’s strategy.
A transactional lawyer helps you:
- Organize and present information clearly
- Protect confidential data through NDAs
- Craft disclosures to manage risk
- Respond to buyer requests without overcommitting
- Keep your deal momentum strong
At Paracuellos Law Group, we help business owners navigate diligence efficiently and intelligently—so you maintain leverage, minimize stress, and maximize value at closing.
