Acquiring an established business can fast-track growth with immediate revenue and existing infrastructure. For example, McKinsey revealed that companies executing two or more small-to-midsize deals annually achieved a 2.3% median excess TSR (total shareholder return) over the last ten years, while organic growth completely eroded shareholder returns in the same period.

However, hidden debts, compliance gaps, or cultural mismatches can quickly turn opportunities into liabilities. That’s why rigorous due diligence is non-negotiable. It validates the target company’s financial information, operational stability, and market positioning, ensuring an informed acquisition process. This article provides a comprehensive due diligence checklist for buying a new business and delves into the best business acquisition practices.

Why buy an existing business?

Purchasing an existing business offers tangible benefits:

• Immediate cash flow. You can skip the years-long grind of building profitability. An established company will generate revenue for you from day one.
• Brand recognition & customer base. Inherit loyal clients, reviews, and market trust. A recognizable brand slashes marketing costs and accelerates future growth.
• Operational infrastructure. Existing staff, workflows, and supplier relationships reduce startup friction. You can avoid the trial-and-error phase of hiring or negotiating vendor contracts.
• Proven business model. Mitigate risk with a track record of success. Financial statements and historical data offer clarity on profitability and scalability.

Risks and challenges to consider

While lucrative, acquisitions aren’t risk-free:

• Hidden liabilities: Undisclosed debts, pending lawsuits, or tax issues can derail a return on investment (ROI). Always verify compliance and legal history.
• Overvaluation: Sellers often inflate worth based on potential, not performance. Scrutinize financials to avoid overpaying.
• Cultural misalignment: Clashes with existing staff or outdated processes may hinder progress. Assess employee morale and workflows early.
• Market vulnerabilities: Declining industries or overreliance on a single client (e.g., >25% revenue from one source) pose sustainability risks.

Buying an existing business checklist

Buying a business is strategic when you value speed, infrastructure, and predictability but only with a meticulous due diligence process. Here is a comprehensive due diligence checklist for buying an existing business:

1. Business financials and valuation

A business’s financial health is the cornerstone of its value. Start by reviewing at least three years of audited financial statements to spot trends, anomalies, or unsustainable practices. Adjust for one-time expenses or windfalls (e.g., pandemic relief grants and lawsuit settlements) to normalize earnings and reveal the business’s true recurring profitability.

Checklist:

• Review the company’s general ledger
• Review profit & loss statements, balance sheets, accounts payable, accounts receivable, and cash flow reports.
• Analyze revenue consistency, expense ratios, and net profit margins. 
• Analyze fixed and variable expenses and foreign income tax returns.
• Review revenue agency reports.
• Compare performance to industry benchmarks.
• Look for sudden spikes/drops in cash flows, which could signal operational issues or seasonality. For small businesses, calculate Seller’s Discretionary Earnings (SDE), which includes owner benefits, to assess cash flows available to a new business owner.
• Evaluate outstanding debts and liabilities.
• Identify loan agreements, unpaid taxes, leases, or pending invoices.
• Confirm whether debts transfer with the sale or will be settled by the seller.
• Scrutinize contingent liabilities (e.g., unresolved lawsuits, warranty obligations) that may not appear on balance sheets but could materialize post-acquisition.
• Determine a fair purchase price. Use multiple methods (e.g., EBITDA multiples, discounted cash flow, or asset-based valuation) to cross-verify the asking price.
• Factor in intangible assets like brand equity. For asset-heavy businesses, confirm depreciation schedules align with equipment lifespan.

Pro tip: Hire a financial advisor to audit the books and make an independent business valuation.

2. Legal and regulatory compliance

Legal missteps can turn a promising acquisition into a liability minefield. Verify that the business adheres to all laws and that contracts are transferable to the new owner. Overlooking compliance gaps or assuming licenses automatically transfer could lead to fines, operational shutdowns, or costly renegotiations.

Checklist:

• Confirm material contracts, consulting agreements, licenses, permits, and registrations.
• Ensure operational licenses (e.g., health permits and zoning approvals) are active and transferable. Industry-specific permits (e.g., liquor licenses and FDA certifications) may require regulatory approval or reapplication under new ownership.
• For franchises or specialized sectors (e.g., healthcare), confirm that the franchisor or federal/state requirements are met.
• Search for ongoing lawsuits, past settlements, or compliance violations (e.g., labor law breaches, unemployment insurance claims history, environmental fines).
• Review non-disclosure agreements (NDAs) or consent decrees that may restrict business operations. Even resolved disputes could hint at reputational risks.
• Scrutinize agreements with suppliers, customers, and employees. Check for clauses tied to ownership changes (e.g., auto-termination, change-of-control provisions) or non-compete agreements. For example, a key client contract that voids upon sale could destabilize revenue. Similarly, employee non-solicitation clauses may limit your ability to retain talent.
• For regulated industries, conduct an environmental compliance audit to uncover hidden violations (e.g., hazardous waste disposal).

Pro tip: Work with a business attorney to draft indemnity clauses in the purchase agreement, protecting you from pre-sale legal issues.

Additional reading: Explore five critical components of a successful due diligence audit.

3. Operational and organizational analysis

Smooth operations post-acquisition depend on retaining key talent and understanding workflows. Assess whether the current team, processes, and tools align with your goals.

Ignoring operational inefficiencies or cultural mismatches can lead to employee turnover, disrupted workflows, or customer dissatisfaction. For instance, a manufacturing business relying on a single warehouse manager with undocumented processes risks chaos if that employee leaves.

Checklist:

• Review the company’s articles of incorporation.
• Evaluate leadership and staff. Review the company’s personnel handbook and organizational chart.
• Identify critical employees and review existing contracts. Will they stay post-sale? Are there retention bonuses, non-solicitation clauses, or stock options? For example, a sales team with non-compete agreements may prevent talent poaching but could also limit your flexibility to restructure.
• Audit the company’s internal control procedures and day-to-day operations
• Map workflows, inventory management, and supply chains. Are there single-source suppliers, logistical bottlenecks, or outdated procedures?
• Analyze inventory turnover rates and order fulfillment times to spot inefficiencies. A restaurant relying on one seafood supplier, for instance, faces risk if deliveries stall.
• Assess technology systems.
• Review software licenses, IT infrastructure, and proprietary tools. Outdated systems may require costly upgrades.
• Check if legacy software is compatible with modern tools—e.g., an outdated ERP system could delay financial reporting or integration with your existing tech stack.

Pro tip: Conduct employee interviews or site visits to gauge morale and operational efficiency firsthand. Shadowing staff for a day can reveal undocumented processes or cultural red flags (e.g., poor communication between departments).

4. Customer and market insights

A loyal customer base and strong market position drive long-term success. Validate the business’s reputation and growth potential. Failing to assess market trends or customer loyalty could leave you with declining sales post-purchase.

Checklist:

• Analyze customer retention and demographics.
• Review churn rates, repeat purchase patterns, and customer satisfaction surveys. Is the client base diversified or reliant on a few accounts?
• Calculate the Customer Lifetime Value (CLV) to prioritize high-value segments. A SaaS company with a 90% annual renewal rate, for instance, signals stability.
• Map the business’s market share, joint venture relationships, unique selling points, and competitor strategies. Are there emerging threats or untapped opportunities?
• Use tools like SEMrush or IBISWorld to benchmark against industry trends—e.g., a local bakery competing with national delivery apps may need a digital pivot.
• Scrutinize online reviews, social media engagement, and media coverage. A damaged reputation may require rebranding investments. Check niche platforms (e.g., Tripadvisor for hospitality and G2 for B2B software) for unfiltered feedback.

Pro tip: Use Customer Relationship Management (CRM) data or third-party tools (e.g., Google Analytics, Yelp Business) to validate customer claims made by the seller. For B2B acquisitions, interview top clients directly to gauge loyalty and uncover unspoken pain points.

5. Company’s assets and liabilities

Catalog everything the sale includes and excludes. Overlooking a lien on a commercial property, for example, could saddle you with unexpected debt, while unverified intellectual property ownership might spark costly legal battles.

Checklist:

• Inspect physical assets such as equipment, real estate, and inventory for condition and ownership.
• Verify that intellectual property rights and digital assets (e.g., domain names, trade secrets, patents) are legally owned. For example, a logistics company’s fleet might be leased rather than owned, inflating perceived asset value. Similarly, a patent listed as an asset could be nearing expiration or entangled in litigation.
• Confirm all loans, lines of credit, and unpaid invoices. Check if the business has liens against its fixed assets.
• Scrutinize excise tax filings, employment tax filings, and tax filings for unpaid payroll taxes, which could result in penalties post-acquisition. Contingent liabilities, such as product warranties or pending lawsuits, should also be quantified.
• Review business credit scores. A poor credit rating could affect your ability to secure financing post-purchase. A declining credit score might indicate underlying cash flow problems, even if current finances appear stable.

Pro tip: Hire a third-party appraiser to validate asset valuations, especially for specialized equipment or intellectual property. 

Best practices when buying a business

Below, we break down actionable strategies, common pitfalls, and the role of expert advisors.

Ensure a seamless transition

A smooth transition minimizes disruption to operations, customers, and employees. Start by drafting a 100-day transition plan that outlines key milestones, from ownership handover to system integrations.

Communicate early with stakeholders, such as suppliers, employees, and loyal customers, to maintain trust. Host a town hall with staff to address concerns and clarify post-sale roles.

Retain critical employees with incentives like stay bonuses or equity offers. Finally, audit and integrate technology systems (e.g., CRM, payroll) to align with your existing processes. 

Pro tip: Use phased integration. Test new workflows in one department before the company-wide rollout.

Avoid common errors

Even seasoned buyers may stumble into errors. For example, underestimating the difficulties of cultural integration is very common. According to Bain & Company, 80% of acquirers focus on integration early but 75% still experience cultural clashes.

Rushing due diligence or skipping steps (e.g., skimping on legal reviews) is another error that may leave you vulnerable to hidden liabilities. Underestimating transition costs, like rebranding or system upgrades, can strain budgets, too.

Lastly, avoid emotional decisions. Falling in love with a business’s “potential” often leads to overpayment. This is particularly relevant for AI startups, which are considered overvalued.

“Everybody’s asking me about it, ‘Is there a bubble here?’ There’s a bubble [in AI valuations]. It’s huge,” said Tom Siebel, CEO of C3.ai in an exclusive interview with Fortune.

Pro tip: Create a “deal-breaker” checklist and stick to it during negotiations:

• Undisclosed debts or liabilities uncovered in financial audits.
• Outstanding legal issues or regulatory non-compliance.
• Critical licenses/permits non-transferable post-sale.
• Key employees unwilling to stay post-acquisition.
• Over-reliance on a single supplier/customer (>30% revenue).
• Physical/digital assets with unverified ownership or tax liens.
• Valuation exceeding industry benchmarks without justification.
• Cultural misalignment impacting post-sale integration.
• Incomplete or unrealistic seller transition commitments.
• Inconsistencies in cash flow statements unexplained by seasonality and trends.

Engage advisory teams

A skilled advisory team is your safeguard against costly errors. M&A consultants provide industry-specific insights, assist with target selection and valuation, and negotiate terms. 

For example, an M&A business broker might identify synergies between your existing business and the target, drastically increasing success chances. Thus, Deloitte has found that M&A deals closely related to the acquirer’s core operations (adjacent deals) result in a 15.9% stock price increase in the first year while cross-industry and large deals erode value.

Source: Deloitte

Pro tip: Vet advisors with acquisition experience in your target sector because generic expertise may not suffice.

Using virtual data rooms for business acquisitions

Virtual data rooms are critical tools for modern due diligence, offering unmatched efficiency and security. They centralize documents (financials, contracts, compliance records) in a single, encrypted platform, eliminating chaotic email chains or misplaced files.

Features like granular access controls, audit trails, and real-time collaboration ensure that only authorized parties view sensitive data while tracking every interaction. Here is how data rooms improve M&A outcomes:

• Accelerate due diligence with organized, searchable file structures.
• Enhance security with bank-grade encryption and watermarking.
• Streamline stakeholder collaboration across time zones.
• Reduce physical costs (printing, couriers) and human error.

Pro tip: Choose a VDR with AI-powered search and Q&A modules to resolve buyer queries faster.

Additional reading: Virtual data room vs Google Drive: Which is really better for M&A?

Case study: StoneX

Fortune 100 financial giant StoneX Group, spanning six continents with 3,800+ employees, adopted Ideals Virtual Data Room in 2018 to streamline buy-side M&A and equity roadshows. Facing complex cross-border deals, they needed a secure, intuitive platform for rapid due diligence.

Ideals delivered granular permissions, real-time activity tracking, and automated document indexing. StoneX now manages 34+ projects on Ideals, creating tailored data rooms for bidders and monitoring interest levels seamlessly. With 24/7 support and a user-friendly interface of Ideals VDR, StoneX confidently serves global clients, ensuring secure, time-sensitive transactions.

“The two use cases we have are buy-side M&A and sell-side fixed income and equity, yet it [Ideals data room] can do both of those things equally well,” said Jonathan Kay, Corporate Development Director at StoneX.

Best VDR providers for buying an existing business

Ideals

Ideals is a top choice for due diligence, trusted by 2M+ users across 175K organizations. Its industry-leading protection, Q&A workflows, and granular audit trails simplify even the most complex transactions while ensuring security, compliance, and transparency.

Key features:

• Eight levels of granular access permissions
• Encrypted downloads with information rights management (IRM)
• Due diligence checklist module
• Automated role-based Q&A workflows
• AI-powered document redaction
• AI document search
• Granular audit trails with filters (70+ trackers)
• ISO 27001, SOC 1/2/3, GDPR, HIPAA, CCPA, LGPD, PCI DSS compliance

SecureDocs

SecureDocs streamlines due diligence with enterprise-grade security and intuitive workflows, trusted by startups and Fortune 500 firms alike. Its balance of simplicity and advanced features ensures rapid deployment for time-sensitive deals.

Key features:

• Five access permissions
• E-signature & NDA templates
• Q&A functionality
• Audit logs with filters
• SOC 2 Type II certification

DFIN Venue

DFIN (Donnelley Financial Solutions) is a leader in secure virtual data rooms, trusted by global enterprises and legal firms for high-stakes M&A and IPO transactions. Its blend of regulatory expertise and cutting-edge technology ensures compliance and efficiency.

Key features:

• Role-based permissions (five roles)
• Information rights management (IRM)
• AI search
• Multi-file redaction
• Granular audit trails 
• ISO 27001 and SOC 2 Type II certification

The bottom line

• Prioritize comprehensive due diligence to uncover hidden risks in finances, compliance, and operations.
• Engage M&A experts (legal, financial, industry-specific) to validate valuations and navigate negotiations.
• Leverage secure VDRs like Ideals or DFIN for organized, auditable document sharing and stakeholder collaboration.
• Plan post-acquisition integration early to retain talent, align systems, and maintain customer trust.