Every acquisition price is built on claims, about profits, assets, compliance and the future. Due diligence is the discipline of testing those claims before they become your problem. Buyers who skip it are not saving money; they are buying the seller's version of the business, sight unseen. This is the checklist we work through for SME acquisitions.
Earnings: is the profit real?
- Trace reported revenue to bank receipts and customer-level data; revenue that exists only in the ledger deserves special attention
- Identify one-off items dressed as recurring income, asset sales, write-backs, a single exceptional year inside a three-year average
- Look for owner adjustments in both directions: family salaries above or below market, personal expenses in the books, rent paid to related parties at non-market rates
- Check whether margins survive the seller's departure, pricing that depends on the owner's relationships is not a margin, it is goodwill on probation
Balance sheet: what are you actually getting?
- Verify the receivables are collectible: ageing, concentration and post-period collections tell the truth quickly
- Confirm inventory exists and moves, physical verification plus turnover analysis, not the register alone
- List every borrowing, guarantee and charge on assets; confirm against external records, since registers are completed by the people who forgot the guarantee
- Hunt the off-book items: pending litigation, disputed tax demands, employee dues, post-dated commitments, the liabilities that transfer silently with the company
Tax and compliance: whose history are you buying?
In a share purchase, the company's entire tax history comes with it.
- Review the status of assessments and open notices across income tax and GST; quantify exposure, do not just list it
- Reconcile GST filings with the books for recent years, mismatches you find now become price adjustments; mismatches found later become your notices
- Check TDS compliance, statutory dues and employee-related deposits; defaults here are both liabilities and a read on management quality
- Confirm licences, registrations and any sector approvals actually transfer with the deal structure being proposed
Dependencies: what breaks on day one?
- Customer concentration: what share of revenue sits with the top three customers, and what do their contracts say about change of control
- Supplier and key-person dependence, including informal arrangements that exist only because of the current owner
- Related-party threads: purchases, sales, premises and loans involving the seller's other entities, each one is a term to renegotiate or a cost to internalise
Turning findings into the deal
Diligence is only useful if it changes the transaction. Each confirmed finding should map to one of: a price adjustment, an escrow or holdback, a warranty with teeth, a condition to closing, or a decision to walk away. The walk-aways are the highest-return engagements we do, even though no deal gets closed.
Practical notes on running it
- Two to four weeks is realistic for a focused SME review once the data room opens; resistance to providing data is itself a finding
- Use advisors who will test the numbers, not just compile them, diligence done by checklist alone confirms whatever the seller organised
- Do it before the price hardens. Diligence after a signed, unconditional agreement is archaeology, not protection