Due Diligence in Valuation: Learning About the Business You’re Buying

due diligence in valuation

Are you in the final stages of buying a business and ready to verify everything you’ve learned about the operation? Don’t sign anything just yet! It’s always best to approach an experienced broker who can complete due diligence in valuation reliably and accurately, preventing any complications with the deal. 

Keep reading to discover everything you need to know about due diligence and how a broker like Terry Watts can help you streamline the process.

What Is Due Diligence?

When it comes to selling a business, due diligence refers to the process by which a potential buyer verifies all the seller’s information about the entity. Buyers should always include due diligence as a condition of the sale because it’s by this process that you may uncover problems or concerns with the business you are hoping to acquire. 

If concerns do arise, including due diligence as a condition of the sale gives you peace of mind. You can either insist the seller remediates the problems or back out of the sale without penalty.

Ensuring Your Due Diligence Is Comprehensive

What do you need to know when buying a business? What follows is an extensive list concerning what a competent broker might inspect during the due diligence process. The list isn’t all-inclusive, so an experienced business broker will tailor it to your specific industry and the company you’re hoping to buy.

General Information

This information includes the company’s business plan and records. It can help you determine what to focus on going forward. Examine the following:

  • The legal documentation concerning the company’s articles of incorporation, including its status over the last three years
  • Bylaws and amendments of the corporation
  • Records of ownership
  • Board meeting minutes
  • The company’s Certificate of Good Standing
  • A list of subsidiaries and entities containing equity interests 
  • Authorized jurisdictions for conducting business
  • Reincorporation or restructuring documents 
  • The business plan, including the market analysis and the executive summary  

Organization and Ownership

Inspecting the company’s organizational structure helps you understand how they run the business so that you can streamline the transition. This category involves the following components:

  • A list containing the names of the officers and directors
  • A chart outlining the organizational hierarchy
  • Records of stocks, options, and warrants
  • A detailed shareholder list, including share assets and transactions
  • Shareholder documentation (ownership, voting agreements, trusts, proxies, and more)


Don’t overlook the value of inspecting administration during your due diligence. This information verifies factors like facilities, occupancy rate, and capacity. It includes the following:

  • A list of all business locations
  • Locations of owned or leased property
  • Areas where the company maintains employees or conducts business
  • The occupancy rate of all locations 
  • The number of workstations at every location


When performing due diligence in valuation, the regulation component identifies potential compliance issues. Are you buying within a heavily regulated industry? This is important. 

Focus your questions on the following:

  • The company’s regulatory compliance policy and code of conduct
  • Records of government-issued licenses, consents, or permits
  • All correspondences, documents, notices, and citations concerning regulatory proceedings
  • SEC, state, and foreign regulatory documents and records
  • Reports from governmental entities, including the EPA and OSHA
  • Potential antitrust issues and analysis therein 


You’re most likely buying the business because of its financial performance, so financial due diligence examines the company’s accounting and financial statements to verify the data. Ask about the following:

  • All documents concerning the company’s capitalization
  • Annual and quarterly financial statements audited for the last three years, including the auditor’s reports
  • Comparable unaudited finances for the same three years
  • Recent interim financial reports
  • Financial projections
  • Detailed strategic plans
  • Comprehensive budget plan
  • All communications between auditors and management for the previous five years
  • Records of accounts (receivable and payable)
  • Detailed reports of depreciation and amortization and any changes in accounting methods within the last five years
  • General ledger
  • Loan and credit agreements, promissory notes, and other debt-financing documents
  • Records of equity, including agreements for stock purchase and subscriptions
  • Internal control procedures
  • Deferred revenue schedules


At its core, operational due diligence seeks any risk factors in the daily business operation. It can identify gaps the buyer should fill through business development. Enquire about the following:

  • Insourced and outsourced elements of the operating model, including key processes
  • Change management process details after any adjustments to the operating model
  • A list and copies of undocumented procedures
  • Team organizational and structural overviews
  • Outline of the company’s support and primary activities 
  • Details for extant and developing products or services (evaluations, tests, surveys, data, and studies)
  • Key performance indicator evaluations
  • Marketing procedure data (CRM information, lead generation reports, research, messaging, and sales analysis)
  • Third-party involvement in the supply chain
  • A list of products, employee numbers, shifts, and capacity categorized by manufacturing site 
  • Supply chain process documentation (inventory, transportation details, delivery times, overhead costs, and contractors)
  • Discounts, credit limits, and terms from the company’s main suppliers
  • Distribution channels and models, including necessary documentation


Most brokers emphasize the importance of due diligence for the company’s tax structure and returns, as the buyer is responsible for any issues they inherit. Your broker should examine the following aspects:

  • Three years of foreign, federal, state, and local income tax returns, as well as state sales tax returns
  • Three years of excise and employment filings
  • Tax election and structure information 
  • IRS proposals for audit adjustments 
  • Tax liens and settlement details 
  • Any additional reports from the IRS


As the buyer, you also inherit the company’s legal problems. During due diligence in valuation, the legal examination identifies problems that could seriously impact your ability to conduct business after the deal. Focus on the following components:

  • Any litigation (pending, settled, or threatened) in which the company is a party 
  • All documentation from active litigation
  • Details concerning injunctions, judgments, settlements, decrees, or other orders
  • Records of all contracts
  • Financial agreements (loans, financing, lines of credit, and franchising)
  • Copies of guarantees and responses to audit inquiries and auditors
  • Complete information about any governmental investigations, past and present


Assessing the company’s technological aspects identifies potential liabilities, areas of growth, and production potential. Your broker should pay close attention to the following:

  • Documentation of the company’s software and corresponding licensing agreements
  • Outsourcing agreements for technological services
  • Analysis of the system’s age and usage
  • Details about interfaces that link separate systems
  • IT process information (development initiatives, operations, security, costs, and recovery procedures)
  • Reports from any cybersecurity event, including breaches


Analyzing the company’s physical assets ensures an accurate picture of the revenue you could generate, including the following:

  • Details of owned or leased properties (rent, location, dates, deeds, appraisals, mortgages, titles, use permits, etc.)
  • Three years of records for every sale and purchase of major capital equipment
  • Lease agreements on all equipment
  • Description, acquisition date, value, and location of any owned or leased fixed assets
  • Equipment appraisals
  • Inventory listings
  • Practices for managing inventory
  • UCC filings

Intellectual Property

While not applicable in every industry, evaluating a company’s intellectual property promises that you won’t have ownership issues. Due diligence in valuation examines the following IP factors:

  • All information concerning registration, pending patents or applications, the trademark process, and copyrights in all forms
  • Chain of title records
  • Records concerning extant or threatened claims in which the company is a party
  • Agreements related to IP (licensing, collaboration, development, and research)
  • List of active social media accounts and websites
  • Detailed information about the company’s proprietary software
  • Generalized information about trade secrets and other unique processes
  • The company’s methodology for protecting IP
  • Licensing expenses and revenue

Human Resources

Unsurprisingly, examining the company’s human resources establishes key employees and helps determine a clear transition plan. While examining human resources, focus on the following:

  • Demographic information about the employees
  • The employee handbook
  • All files concerning employee relations, including disputes and complaints
  • Agreements of non-disclosure, non-compete, and non-solicitation
  • Stock options and purchase plans
  • Key employee resumes
  • Retirement plan documentation
  • Assessments of employee competence, capabilities, and skill sets
  • Performance review methodology
  • Recruiting and onboarding procedures
  • Payroll documents
  • Labor and employee contracts


Commercial due diligence analyzes the company’s place within the market to determine viability. Your broker should inspect the following:

  • A list of extant and developing products and services
  • Comprehensive market research
  • Major competitor profiles
  • Top customers
  • Analysis of the demographics, turnover, satisfaction, acquisition cost, etc.
  • Major suppliers
  • Marketplace entry obstacles
  • Overview of claims about complaints and warranties
  • Long-term sales contracts
  • Distributor, reseller, and dealer agreements

How a Broker Aids in Due Diligence

How long could it take to buy the business you want? Due diligence doesn’t have to be a long-winded affair, but the process itself differs depending on the industry, company, offer details, and more. That’s why it’s helpful to have an experienced broker who knows the questions to ask.

Terry Watts Can Help You Make a Better Decision With Reliable Due Diligence

When you need thorough due diligence in valuation, broker Terry Watts advocates for you using expertise and extensive experience as an entrepreneur. If you’d like to go over the finer details with Terry Watts, Sacramento Business Broker, call (916) 905-4997 or fill out this form. Your potential acquisitions and investments will be in good hands here.

More About Terry:

Buying or Selling a business can be a stressful and often confusing process. As a business broker, I bring years of valuable, personal experience to help you through the process. For my buyers and sellers, I provide professional valuations, confidential listings, automated buyer inquiry systems, and stay in touch throughout the entire process with regular check-ins. By keeping an eye on the goal, the successful transfer of a business, we will work together to make it happen as quickly and smoothly as possible.

 – Terry J. Watts

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