Jon Tennant
Broker · Raleigh-Durham
Due diligence is the most important phase of buying a business. It is your opportunity to verify everything the seller has told you, uncover anything they have not, and make an informed decision about whether to close, renegotiate, or walk away.
In North Carolina, most purchase agreements allow 30 to 60 days for due diligence after the letter of intent is signed. Use every day of it. Here is what to check.
This is the core of any business acquisition review and deserves the most attention. The goal is to verify that the business's financial performance is exactly what the seller represented.
Tax returns. Pull three to five years of federal business tax returns and compare them to the profit and loss statements the seller provided. Inconsistencies between what was reported to the IRS and what the seller claims the business earns are a serious red flag. What a seller reports to the IRS is generally the most reliable number because there is real legal consequence for misrepresentation there.
Bank statements. Match the bank statements to the tax returns and P&L. Revenue that appears on the books but cannot be traced to actual bank deposits is a problem. Sellers sometimes claim cash sales that are difficult to verify. Be very cautious about valuing or financing unreported income.
Seller's discretionary earnings. Work with your accountant to independently recalculate the SDE from the verified financials. Do not rely solely on the number the seller or their broker has presented. Verify every add-back claimed and make sure it is legitimate and non-recurring.
Accounts receivable and payable. Who owes the business money and how old are those receivables? Aging receivables over 90 days are often uncollectable. What does the business owe to suppliers, vendors, or creditors? Understand the full picture of outstanding obligations before you close.
Customer concentration. Pull revenue by customer for the last three years. If one or two accounts represent 30% or more of revenue, understand the nature of those relationships. Are they under contract? Have they been informed of the pending ownership change? What is the likelihood they stay post-transition?
Confirm the business entity is in good standing with the NC Secretary of State. An entity that has fallen out of good standing due to missed annual reports or unpaid fees creates complications at closing.
Review all contracts the business is a party to. This includes customer contracts, supplier agreements, equipment leases, and any distribution or franchise agreements. Look for assignment provisions that require the other party's consent to transfer the contract to a new owner. Some of these require active consent before closing.
Litigation history. Ask the seller to disclose any current or pending litigation and any litigation in the last five years. Review any judgments or settlements. Unresolved legal matters can transfer to the buyer in a stock sale and create liability exposure even in an asset sale if not properly addressed.
Intellectual property. Does the business own any trademarks, patents, copyrights, or proprietary software? Confirm ownership is properly documented and registered. If the business name or logo is central to its value, verify the trademark is registered and transferable.
NC Bulk Sales Notice. North Carolina requires compliance with Article 6 of the Uniform Commercial Code for bulk transfers of business assets. This is designed to protect buyers from a seller's existing creditors making claims against assets after the sale. Your business attorney should handle this.
Spend time in the business. Tour the location, observe operations, and talk to employees if the seller permits it under the confidentiality agreement. What you see and hear in person often tells you more than any document.
Key employees. Who are the people the business cannot run without? Are they aware of the pending sale? Are they likely to stay under new ownership? Consider whether employment agreements or retention bonuses need to be part of the deal structure.
Supplier relationships. Who are the primary suppliers and what are the terms? Are those relationships transferable? Are there any supplier agreements that would change under new ownership?
Customer relationships. How are customers acquired and retained? Are relationships tied to the owner personally or to the business as an institution? The more owner-dependent the customer relationships, the more risk you are taking on at closing.
Verify that all required state and local licenses and permits are current. In NC, many business licenses are issued to the entity and transfer with an asset sale, but some require the new owner to reapply. Industry-specific licenses, particularly in healthcare, food service, childcare, and financial services, have their own transfer rules that need to be understood before closing.
If the business has a liquor license, understand the NC ABC transfer process and timeline. Liquor license transfers in NC can take 60 to 90 days and require ABC Commission approval.
If the business operates from leased space, review the lease thoroughly. When does it expire? What are the renewal options and terms? What is the monthly rent as a percentage of revenue? Is the landlord willing to assign the lease to a new owner? A short or unfavorable lease is one of the most common deal killers in business acquisitions.
If the seller owns the real estate, clarify early whether it is being included in the sale or sold separately. The structure of the real estate component has significant tax and financing implications for both parties.
Do not conduct due diligence alone. You need a CPA who specializes in business acquisitions to review and verify the financials. You need a business attorney to review all contracts, the purchase agreement, and the closing documents. Your broker can help you interpret what you find and navigate the negotiation if issues arise.
The cost of a proper due diligence team is a fraction of what a missed problem can cost you after closing. This is not the place to cut corners.
At Jon Tennant Real Estate and Business Brokerage, operating under Midtown Mergers and Acquisitions, we guide buyers across Wake and Durham County through the full due diligence process. Reach out if you are in the process of evaluating a business or approaching the LOI stage.
Contact JonWhat first-time buyers need to know about screening listings, NDAs, LOIs, due diligence, SBA 7(a) financing, and closing.
Credit score requirements, the 10% down payment, DSCR, timelines, seller financing, and finding the right lender.
The three main valuation approaches, Seller's Discretionary Earnings, industry multiples, and what drives your multiple.