Due Diligence When Selling a Small Business: How to Prepare as the Seller

Once a buyer signs a letter of intent, they'll want to check everything you've told them. That stage is called due diligence. Here's what they usually look at, and how to get ready so it goes smoothly.

What due diligence is

Due diligence is the buyer's chance to confirm that the business matches what you've described before they commit. It normally starts after a letter of intent is signed and runs under the confidentiality agreement you already have in place.

For a small business, the buyer is usually helped by their accountant, their lawyer and, if they're borrowing, their lender. Each will have their own list of questions.

What buyers usually check

• Financial: three to five years of financial statements and tax returns, recent monthly results, bank statements, and an explanation of any owner expenses you've added back.
• Tax: GST/HST and PST filings, payroll remittances, and whether anything is owing to the Canada Revenue Agency or the province.
• Legal: your business registration, the lease, permits and licences, key contracts, and any past or current disputes.
• Staff: who works there, how they're paid, employees versus contractors, and any written agreements.
• Customers and suppliers: how concentrated sales are, whether key relationships depend on you personally, and any supplier terms that might change with a new owner.
• Assets: the equipment list, its condition, any loans or liens against it, and inventory.
• Day-to-day operations: how the business actually runs, and what would happen in the first months without you.

Our documents checklist lists the paperwork for each of these areas and when it's usually shared.

How to prepare before a buyer asks

1. Gather the documents first. Put them in one folder, in order, with clear file names. Missing paperwork is the most common cause of delay.
2. Write down your add-backs. If your profit includes personal or one-time expenses, list each one with the amount and a short reason, so your accountant can confirm it.
3. Answer the obvious questions in writing. Why are you selling? What would you improve? What happens if a key customer or staff member leaves? Short, honest written answers save repeated meetings.
4. Raise known issues early. A lease that ends soon, an old dispute, or equipment that needs replacing is easier to handle when you mention it first and explain it calmly.
5. Check your lease. Find out whether the landlord must approve an assignment and what they'll need. This often takes longer than people expect.
6. Decide who answers what. Agree with your accountant and lawyer which questions go to them, and keep a simple log of what you've shared and when.

Keeping it on track

• Agree on a timeline in the letter of intent, with a date by which due diligence should be finished.
• Share documents in stages and keep the most sensitive items, such as customer names and staff pay, until the buyer is close to committing.
• Keep running the business normally. A dip in sales during due diligence can reopen the price discussion.
• Expect follow-up questions. They're normal and usually a sign the buyer is serious, not that something is wrong.

A note on advice

This guide is general information, not legal, tax or financial advice. What you say during due diligence can become part of the promises in your purchase agreement, so have your lawyer and accountant involved before you share or confirm anything important.

For the wider plan, see how to sell your business without a broker, how to prepare your business for sale and how long it takes to sell a small business.