Buying a business is a high-stakes game.

There’s a lot of risk, complexity, and requirement to evaluate all of the above. Buyers rightfully fear not being able to navigate this process successfully, worried they’ll end up with a lemon.

But here’s the thing: due diligence is your safety net. Due diligence is how you confirm that what you’re buying is actually what you think it is.

 

Source: Investopedia | Due Diligence: Types & How to Perform

 

Even though due diligence can seem like the most overwhelming part of the acquisitions process, it’s a lot simpler than you think. Even more so if you hire someone to help you with it.

There are three aspects of due diligence: financial, legal, and operational. If you’re able to tackle these and in the right order, you’ll move through this process faster, with more confidence, and with fewer surprises.

In this week’s article, I’m breaking down not just the three parts of due diligence, but more importantly, the best way you can approach them so you can close deals with speed, giving the seller the certainty needed to get to the finish line. Let’s dive in.

 

1. Financial Due Diligence: The Foundation of the Deal

The first – and most critical – step in due diligence is financial diligence. If a deal is going to fall apart, this is where it happens.

At its core, financial due diligence answers two questions:

1. Is what was presented to me true?
2. Is there anything new I need to uncover?

This phase is about verifying the numbers. Are revenue, expenses, and profits what the seller claims? If you’re going to retrade or renegotiate, it’s almost always because of what you find in financial diligence.

 

Source: SignalX | Everything You Need to Know About Financial Due Diligence

 

Why This Comes First

Picture a graph – one axis is time, the other is sensitivity. As a buyer, you earn the right to ask for more sensitive details over time. However, sellers won’t hand over their most sensitive information upfront. They need to see commitment first.

The best way to get access to the more critical and sensitive information is to complete financial due diligence first.

In fact, going off the 80-20 rule, the majority of deal issues arise from this phase. If the numbers don’t check out, no amount of legal or operational due diligence is going to fix it.

If that happens to be the case – where something is off and you need to retrade – do it early. Do it fast. Ideally, within the first two weeks of the due diligence period.

During this phase, you’re not diving deep into operational stuff – checking out driving routes, employees, day-to-day logistics. No. All that information will creep in as you start to wrap your head around the numbers, but your number one focus at this point is verifying the financials.

 

Key Steps in Financial Due Diligence

If you’re conducting due diligence on your own, follow these steps to complete a thorough financial due diligence:

1. Verify Revenue & Profitability: Compare bank statements, tax returns, and P&Ls to confirm they match what the seller claims.
2. Check for Undisclosed Liabilities: Look for hidden debt, outstanding invoices, and anything that could hurt profitability.
3. Understand Cash Flow: Make sure the business generates consistent cash flow to sustain operations post-close.
4. Assess Customer Concentration: If too much revenue comes from a handful of customers, that’s a risk.

Bottom line: If the numbers don’t check out, walk.

 

2. Legal Due Diligence: Establishing the Legitimacy of the Business

With financials confirmed, legal due diligence should run in parallel. This phase ensures that the business is structured properly, contracts are in place, and there are no hidden legal risks.

At its core, legal due diligence answers one fundamental question: Is this business legally structured and compliant?

 

Source: Motiva Business Law

 

What to Look for in Legal Due Diligence

• Ownership & Corporate Structure: Confirm the seller has the legal right to sell. Review operating agreements and corporate filings.
• Contracts & Agreements: Ensure that supplier, customer, and employment contracts will transfer with the sale.
• Intellectual Property (IP) & Trademarks: Validate ownership of patents, trademarks, and proprietary assets.
• Litigation History: Check for past or pending lawsuits that could impact the business.
• Regulatory Compliance: Is the business fully compliant with industry regulations, or are there hidden risks?

🚨 Biggest Legal Red Flag: Non-transferable contracts.

If key supplier agreements, employment contracts, or licenses don’t transfer, the business could face major disruptions post-close.

 

Get Legal Done Early, Or Risk Delays

Legal due diligence is essential, but it can also slow deals down unnecessarily if you don’t manage it effectively. Lawyers are trained to find risks—that’s their job. But not all risks are deal-breakers.

You don’t need a legal team to eliminate every potential risk (which is impossible). You need them to identify and assess risks so you can make informed decisions.

💡 Pro Tip: Work with an M&A lawyer who specializes in business acquisitions. They’ll focus on what truly matters instead of overcomplicating the process.

 

Source: Transactional Lawyer | Instagram

 

3. Operational Due Diligence: Preparing for Ownership

Once financial and legal due diligence are complete, you’re no longer evaluating the deal – you’re preparing to take over.

Operational due diligence is about understanding how the business actually runs and identifying anything that might impact performance post-close. It’ll help you answer:

• What are the key drivers of success for this business?
• What processes and systems need to be maintained or improved?
• Are there any major operational risks?

Key Areas of Operational Due Diligence

As you dig into operational due diligence, take the time to answer these key questions:

1. Supply Chain & Vendors: Who are the key suppliers? Are vendor relationships stable?
2. Employee Roles & Responsibilities: Which employees hold critical knowledge, and how dependent is the business on them?
3. Customer Retention & Satisfaction: What percentage of revenue is from repeat customers? Are there any customer concentration risks?
4. Technology & Infrastructure: What systems, tools, and processes does the company rely on?
5. Transition Plan: Will the seller provide training or consulting after the sale?

At this stage, trust in the deal should already be high. Financial and legal diligence have validated the business’s fundamentals, so operational diligence is less about uncovering deal-breakers and more about understanding how to take over successfully.

 

Source: Consultport

 

Speed and Confidence: The Key Advantages of Smart Buyers

Smart buyers know how to balance thoroughness with efficiency. They don’t waste time overanalyzing minor details – they focus on the key risks that actually impact valuation and business continuity.

What Smart Buyers Do Differently

1. Prioritize financial and legal diligence first – Without these, the deal doesn’t move forward.
2. Move quickly – If something needs to be renegotiated, they handle it early.
3. Approach operational diligence with clarity – This phase is about transition planning, not finding reasons to kill the deal.

Too many buyers get stuck in analysis paralysis. They want endless reports, spreadsheets, and reassurance. But businesses aren’t just numbers – they’re people, processes, and execution.

If you understand the fundamentals, you don’t need every tiny detail to make a decision.

Trust the Process

Due diligence isn’t about creating a massive checklist—it’s about focusing on the risks that truly matter in an acquisition.

If you systematically work through financial, legal, and operational diligence, you’ll move toward closing with confidence, negotiate more effectively, and set yourself up for a successful transition into ownership.

Recap:

✅ Financial Due Diligence – Confirms the numbers are real.

✅ Legal Due Diligence – Ensures structural integrity and contract transferability.

✅ Operational Due Diligence – Prepares you for ownership and transition.

Master these three areas, and you’ll separate yourself from buyers who overanalyze and overcomplicate the process.

Ready to acquire a business in the next 12 months? The Acquisition Lab is your first stop. Reach out to us today and get on the fast track to becoming an acquisition entrepreneur.