You’ve spent years building your company. Now, as you prepare to sell your business, new parties will review the details of how you run it. That scrutiny can feel invasive, yet strong preparation lets you lead the conversation.
When you decide to sell your small business, buyers and their advisors will rebuild your financial performance, assess operational risk, and pressure-test growth. They can request hundreds of documents, ask direct questions, and look for gaps they can use to push the price down.
This checklist groups common requests, explains what each item signals, and helps you prepare before questions arrive. In this blog, you’ll learn how a broker can manage due diligence, so you stay focused on operations.
1. Financial Documentation: The Foundation of Buyer Confidence
Your financial records face the hardest scrutiny since they support your asking price. Buyers and their advisors rebuild profitability from source documents, not summaries. Gaps or inconsistencies here can stall a deal faster than almost anything else.
Historical Financial Statements
Prepare three to five years of income statements, balance sheets, and cash flow statements. Consistency matters more than whether you used audited, reviewed, or compiled statements. If you relied on reviewed statements in prior years, keep that approach for the most recent year.
Reviewed statements often meet buyer expectations at this stage. Buyers care most about clean ties between financial statements, tax returns, and underlying records.
Tax Returns and Their Reconciliation
Gather federal, state, and local tax returns that cover the same period as your financial statements. Buyers use tax returns to understand taxable income trends, major deductions, and any one-time items that need a clear explanation during diligence.
Common differences include revenue timing, depreciation methods, and state apportionment calculations. Identify these items early and write a clear explanation before buyers ask.
EBITDA Add-Backs and Normalization Schedules
Your adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) determines valuation. Document every add-back with supporting evidence:
- Owner compensation above market rate: Show market salary benchmarks and explain the role, responsibilities, and current pay structure.
- One-time expenses: Provide invoices and a brief note on why the cost will not repeat after closing.
- Personal expenses run through the business: Flag the items clearly and tie each one to supporting receipts or account details.
- Non-recurring legal, consulting, or professional fees: Share engagement summaries, invoices, and the reason the work will not continue post-sale.
Strong support matters more than the number. A $200,000 add-back with solid documentation strengthens your position. The same add-back without support turns into a discount.
Quality of Earnings Reports
A Quality of Earnings (QoE) report provides third-party validation of financial performance. This investment makes sense for businesses above $5M in enterprise value or transactions with complex revenue recognition.
A seller-commissioned QoE report can reduce last-minute price cuts. When your advisor validates EBITDA before the buyer brings in analysts, you set the baseline for negotiation. A $30,000 to $75,000 report often costs less than a single round of price retrading.
Detailed Supporting Schedules
Buyers often request schedules that support your summary financials and confirm how the business operates. Having these prepared in advance helps reduce delays and keeps due diligence focused.
Common supporting schedules include:
- Accounts receivable aging that shows collectability, payment patterns, and past-due exposure
- Accounts payable aging to reflect vendor terms and cash flow management
- Inventory valuation method, turnover, and any obsolescence reserves
- Debt schedules outlining balances, terms, rates, and payoff amounts
- Capital expenditure history separates maintenance from growth spending
- Fixed asset register with ownership details and depreciation schedules
When these schedules tie clearly to your financial statements, buyers gain confidence in the numbers, and the due diligence process moves more efficiently.
2. Legal and Compliance Documentation
Legal documents define what the buyer buys and which liabilities stay with the company. Missing records can slow the deal, delay consents, and raise tougher legal demands at closing.
Corporate Formation and Governance Records
Gather core documents such as articles of incorporation, bylaws, operating agreements, ownership records, and stock certificates. Add shareholder agreements, board minutes, and certificates of good standing.
Clean records support the deal structure. A stock sale depends on clear ownership documentation. An asset sale gives you more flexibility, yet you still need documented authority to sell.
Contracts That Define Business Relationships
Collect and organize every material contract:
- Customer agreements with key terms, renewal dates, and assignment language: This shows revenue stability and clarifies what must happen for the buyer to keep key accounts after closing.
- Supplier contracts with pricing terms and any exclusivity provisions: This confirms cost structure and supply continuity, so buyers can underwrite margins with fewer assumptions.
- Equipment and real estate leases: This confirms location stability, equipment access, and ongoing cost terms so buyers can underwrite operations with confidence.
- Employment agreements for key personnel, including non-compete terms: This confirms retention terms and post-sale protections, so buyers can validate continuity plans and move through diligence with fewer follow-up requests.
Identify contracts that require consent for assignment before you go to market. When you secure consents early, you remove one of the most common closing delays.
Intellectual Property and Proprietary Assets
List and document all intellectual property, including patents with registration numbers, trademarks with renewal dates, copyrights, software licenses, and domain names.
Many lower middle market businesses rely on informal IP. Put trade-secret practices into written policies. Document ownership of customer lists and other proprietary materials, even if you store them in simple files.
Licenses, Permits, and Regulatory Compliance
Compile operating permits, professional licenses, environmental assessments, regulatory filings, UCC filings, and lien search results that show clear title and compliance.
Also Read: How to Prepare for a Due Diligence Audit Before Selling Your Business
3. Operational and Organizational Documentation
Buyers purchase cash flow and take on day-to-day operations. Your documentation of how the business runs determines buyer confidence in maintaining performance after the close.
Organizational Structure and Key Personnel
Show the team with a current org chart, key resumes, compensation structure, turnover history, and succession coverage for critical roles. Buyers will test the key person risk.
If your VP of Sales owns the customer relationships, document a transition plan that protects those accounts through an ownership change. If your operations manager runs daily work independently, document the systems, controls, and training that keep performance steady during personnel changes. When you address these points early, buyers spend less time building a discount around dependency risk.
Customer and Revenue Analysis
Break down revenue in a way buyers can underwrite:
- Customer concentration: Buyers want to measure downside risk if one account shrinks or leaves after closing.
- Retention metrics: Buyers use this to judge revenue durability and how much effort it takes to keep customers.
- Revenue mix: Buyers need this to see what drives growth, where margins differ, and which segments carry the most risk.
- Sales pipeline: Buyers use this to test near-term momentum and validate that recent performance can continue.
If one customer represents a large share of revenue, prepare a short account profile. Cover relationship length, contract terms, renewal cadence, pricing history, service cadence, and recent order trends. Add your transition plan and the steps already in motion to broaden the base.
Process Documentation and Systems
Show how the business operates with clear documentation:
- Documented workflows: Map the steps for core functions such as sales, finance, operations, and customer service.
- Technology systems inventory: List each system, its purpose, licensing details, user access, and renewal dates.
- CRM and customer data: Document what you track, how you report it, and who owns and maintains the data.
- Quality control procedures: Outline standards, inspection steps, and how you handle defects or rework.
- Training programs: Capture onboarding steps, role training, and reference materials that protect institutional knowledge.
Documented processes support higher valuations. They show the business can run without daily owner involvement. Buyers pay more when knowledge lives in systems, not in individual memories.
Read Also: A Seller’s Guide to Pre-Sale Prep: What to Expect from a Business Broker
4. Identifying and Addressing Red Flags Before Buyers Do
Every business has issues. When you find them early, you can resolve what’s fixable and present the rest with clear context. That approach supports cleaner terms and a smoother path to close.
Financial Red Flags
Before entering buyer due diligence, review your financials for issues that commonly raise questions or slow negotiations. Identifying these early gives you time to explain them clearly or address them before they become sticking points.
Common financial red flags include:
- Accounting inconsistencies: Changes in accounting methods or classifications without a clear operational or strategic reason.
- Off-balance-sheet obligations: Operating leases, guarantees, or contingent liabilities that are not obvious from the balance sheet.
- Deferred maintenance: Underinvestment in equipment or facilities that may overstate short-term profitability.
- Revenue recognition timing: Aggressive or inconsistent recognition practices that could impact earnings quality.
- Related-party transactions: Owner, family, or affiliate transactions that require disclosure and justification.
Addressing these items in advance allows you to control the narrative, support your valuation, and reduce the risk of price adjustments or delays once negotiations begin.
Legal and Operational Exposures
Review legal and operational exposure areas:
- Pending or threatened litigation: Matters that can delay closing or change deal terms.
- Tax positions: Items that may trigger challenges or require reserves.
- Environmental liability: Known issues, past assessments, and site history.
- Employment compliance: Wage and hour practices, classification, and policy gaps.
- Informal arrangements: Verbal agreements and handshake deals that need a contract.
Use the prep period to reduce risk. Put key agreements in writing, close compliance gaps, and resolve open legal items before a buyer raises them.
5. Creating Your Secure Data Room
Your virtual data room serves as the central hub for the sale. Build it for fast review with clear folders by category, consistent file names, version control, and an index that ties documents to common request lists.
Control access in stages based on NDA status and deal progress. Track activity so you know what each buyer reviewed, then respond to follow-up requests with discipline to avoid over-disclosure.
Update the data room on a set cadence. Add monthly financials and new items as they come up so buyers always work from current information.
Why Proactive Preparation Changes the Dynamic
Most sellers wait for buyers to request documents. That reactive scramble signals disorganization and puts you on defense. Proactive preparation lets you control the pace, show operational maturity, and address issues before buyers turn them into leverage.
What Buyers Learn from Your Preparation
Buyers use document readiness as a shortcut for how you run the business. When you deliver financial statements in hours instead of weeks, buyers expect the same discipline across the company. Slow responses, missing records, and inconsistent data invite tougher questions and weaken trust.
The Financial Impact of Being Unprepared
Strong preparation supports faster momentum and steadier deal terms. When you keep diligence moving, you reduce friction, limit follow-up rounds, and protect focus on day-to-day operations. A timely process can help keep valuation and financing aligned with the original plan, even as market conditions shift.
In the lower middle market, preparation makes an outsized difference. If you can produce core records quickly on a $15 million transaction, you shorten the timeline, reduce buyer uncertainty, and support cleaner terms at close.
Starting Preparation Today
When you sell your business, you need a process that protects confidentiality, limits distraction, and keeps diligence moving. Lake Country Advisors can run a confidential diligence readiness review and help you build the documentation plan and data room structure that buyers expect.
Contact our team to discuss your timeline and what you can prepare now!
