Paul Mazzola
October 16, 2026
Fact checked by the Dealflow team
How to use this checklist
Buying a business starts with a clear deal thesis and disciplined validation. Use the questions below to stress test your assumptions, quantify risk, and link findings to price, structure, and integration plans.
Start by defining what must be true for your deal thesis, then use these questions to try to break it. Set non-negotiable walk-away conditions, then map bad answers to actions like reprice, restructure, or walk.
| Focus | Top questions | KPI thresholds | Bad answers | Action |
|---|---|---|---|---|
| Deal thesis | What drives value creation in 12 to 24 months? | Clear levers with measurable KPIs | Vague growth story, no owners | Reframe thesis or walk |
| Walk-away lines | At what customer concentration or churn do we exit? | Single customer ≤ 10%; churn stable | Top customer > 20% without mitigation | Reprice or require earnout |
| Scope control | Which 5 issues can kill the deal? | Prioritized diligence plan | Boiling the ocean | Timebox and escalate |
Advisory disclaimer
The content of this site is for educational purposes only and does not constitute legal, tax, or financial advice. Always consult with a licensed professional for advice about your specific situation.
Financial and commercial questions
Lead with revenue quality, margin durability, and cash conversion. Validate EBITDA with a quality of earnings, and set a working capital target before you price the deal. Transition findings into clear pricing and structure changes.
| Focus | Top questions | KPI thresholds | Red flags | Response |
|---|---|---|---|---|
| Revenue quality | % recurring vs one-time; churn over 3 to 5 years; customer concentration | Recurring > 60%; single customer ≤ 10% | Churn rising; > 20% from one customer | Reprice; require retention plan or earnout |
| Margins | Gross margin drivers; fixed vs variable split; unit economics | Stable or improving 3 to 5 year trend | Unexplained margin compression | Normalize EBITDA; adjust price |
| Working capital | DSO/DPD trends; AR/AP aging; inventory turns | DSO ≤ 45 days; turns ≥ 4x | Growing AR past due; obsolete stock | Raise WC peg; escrow for risks |
| Cash flow | Maintenance vs growth capex; off-balance liabilities | Maintenance capex predictable | Hidden earnouts or leases | Indemnity or price reduction |
Key questions to ask
- Revenue quality: What percent of revenue is recurring, contractual, and auto-renewing? What is logo and net revenue churn over the past 3 to 5 years, including downturn periods?
- Concentration: Do any customers exceed 10% of revenue or 15% of gross profit? What mitigation or multi-year contracts exist?
- Margins: What drives gross margin by product or channel? How have margins trended over 3 to 5 years, and why? Which costs are fixed versus variable?
- Unit economics: What is fully loaded contribution margin after direct labor, variable marketing, and support?
- Working capital: What is normalized working capital, and how is it calculated? Show AR/AP aging, inventory turns, and DSO/DPD trends.
- Cash flow: Split maintenance versus growth capex for the last 3 years, and map to capacity utilization.
- Quality of earnings: What EBITDA adjustments remove one-time or owner expenses? Describe revenue recognition policies and any needed restatements.
- Forward view: What supports next-year sales projections, and how does historic pipeline-to-close conversion compare?
Documents to request
- 3 to 5 years of audited or CPA-reviewed financials, monthly P&L and cash flow for the last 24 months, and revenue by customer and product.
- AR/AP aging schedules, DSO/DPD, inventory listings with obsolescence reserves, and inventory turns by SKU.
- QoE report or trial balance with detailed EBITDA normalizations, revenue recognition memos, and capex schedules.
- Customer cohort and churn analysis, pipeline reports, and win/loss data.
How findings affect price and terms
- Forecast risk: Use an earnout tied to revenue or gross profit if pipeline quality is uncertain.
- Concentration risk: Add customer retention escrows, step-down pricing tied to renewals, or longer seller financing.
- Working capital: Set a peg based on 12-month average and adjust cash at close for under-delivery.
Legal and regulatory questions
Confirm you can actually run the business on Day 1. Center diligence on assignability, change-of-control triggers, and compliance items that can stall or kill the deal. Translate issues into conditions to close and targeted protections.
| Focus | Top questions | Critical checks | Red flags | Response |
|---|---|---|---|---|
| Contracts | Assignability and change-of-control; termination rights | Customer, supplier, and landlord consents | Key contract not assignable or requires long consent timeline | Delay close, escrow, or walk |
| Litigation | Current, threatened, and settled claims | Materiality thresholds | Undisclosed claims or investigations | Indemnity, RWI, or price cut |
| IP ownership | Assignment from employees and contractors | Freedom-to-operate | Missing assignments; third-party code issues | Holdback or fix before close |
| Compliance | Licenses, permits, privacy posture | GDPR/CCPA and industry rules | Fines, gaps, or expired permits | TSA, remediation plan, or walk |
Key questions to ask
- Contracts: Which agreements require consent to assign or have change-of-control triggers? Any termination-for-convenience clauses?
- IP: Who owns core IP, domains, code repositories, and trademarks? Are all contributor assignments executed?
- Regulatory: What licenses and permits are required, and what is their status? Any ongoing audits, investigations, or consent decrees?
- Tax: Provide 3 years of income and sales tax returns, settlements, liens, and employment or excise filings.
- Ownership: Provide cap table, side letters, liens, and encumbrances on assets.
Documents to request
- All customer, supplier, and landlord agreements with assignability and change-of-control language marked.
- Litigation docket, settlement agreements, and counsel letters.
- IP registrations, assignments, open source use logs, and license agreements.
- Privacy policies, DPIAs, security policies, and last penetration test report.
- Tax returns, nexus analysis, and state registration certificates.
How findings affect price and terms
- Missing consents: Add a special indemnity and escrow until consents are obtained, or defer close with a bridging TSA.
- IP gaps: Require assignments as a condition to close; add holdbacks for remediation.
- Compliance risk: Use RWI where available, or reduce price for remediation cost plus risk premium.
Operations and technology questions
Validate capacity, reliability, and scalability. Focus on single points of failure and tech debt that can drain cash post-close, then tie remediation to price or holdbacks.
| Focus | Top questions | KPI thresholds | Red flags | Response |
|---|---|---|---|---|
| Capacity | Utilization, bottlenecks, and lead times | OEE ≥ 70%; on-time delivery ≥ 95% | Chronic backlogs; unplanned downtime | Capex plan; reprice |
| Supply chain | Single-source dependencies; logistics | Dual-sourcing for top SKUs | One vendor controls critical input | Supplier guarantees or walk |
| Quality | Returns, defects, complaints | Return rate ≤ 3% | Rising warranty claims | Reserve increase; price adjust |
| Tech stack | System currency, technical debt | Supported versions; patch cadence | EOL systems; no documentation | TSA for remediation; holdback |
| Cybersecurity | Pen tests, incidents, controls | Recent test with remediation | Unpatched critical findings | Security uplift pre-close |
Key questions to ask
- Operations: What is the production or service flow, and where are the bottlenecks? What is current capacity and required capex to scale?
- Suppliers: Who are single-source vendors, and what are contract terms, SLAs, and alternatives?
- Assets: Which assets are owned versus leased, age and condition, maintenance logs, and utilization.
- Inventory: What are on-hand levels, turns, and obsolescence risk by category?
- Technology: What are the core systems and versions in use, integration points, and known tech debt?
- Cybersecurity: When was the last penetration test, what were the findings, and what evidence of remediation exists?
- Digital assets transfer: Confirm ownership and transferability of domains, websites, analytics, ad accounts, marketplaces, social handles, CRM, ERP, and code repositories.
Documents to request
- Process maps, SOPs, OEE and throughput data, and on-time delivery metrics.
- Supplier contracts, pricing history, and dual-sourcing plans.
- Fixed asset register with purchase dates, depreciation, and maintenance history.
- Inventory listings with aging and reserve policy, and cycle count accuracy reports.
- System architecture diagrams, license inventories, security policies, and pen test reports.
How findings affect price and terms
- Capacity constraints: Negotiate capex seller credits or adjust price; include performance-based earnouts tied to throughput.
- Tech debt: Add a TSA for systems remediation and negotiate holdbacks to fund upgrades.
- Cyber issues: Require immediate fixes pre-close or secure cyber indemnities and insurance.
People and culture questions
Protect the operating core. Identify key person risk, cultural incompatibilities, and retention costs before you price synergies. Tie plans to Day 1 accountability.
| Focus | Top questions | KPI thresholds | Red flags | Response |
|---|---|---|---|---|
| Leadership | Dependencies and succession plans | Bench depth for critical roles | Founder-only relationships | Retention plan; seller transition |
| Culture | Decision-making style and fit | Healthy engagement trend | Toxic reviews; high conflict | Integration coaching or walk |
| Workforce | Comp, benefits, contracts | Turnover ≤ 15% | Surprise bonuses or liabilities | Price adjust; escrow |
Key questions to ask
- Leadership: Who holds irreplaceable knowledge or customer relationships, and what is the plan if they leave?
- Retention: What change-of-control triggers or stay bonuses are in place, and what will it cost to retain the top 10 employees?
- Culture: How are decisions made, and what are the norms for accountability and communication?
- HR: Provide org chart, headcount by function, employment agreements, benefits, and any recent layoffs or pay changes.
- Compliance: Confirm payroll tax and benefits compliance, including any outstanding claims.
Documents to request
- Org chart, job descriptions, and performance reviews for key roles.
- Compensation bands, bonus plans, equity or phantom equity documents, and benefit summaries.
- Employee handbook, policies, and any pending HR claims.
How findings affect price and terms
- Key person risk: Require seller transition agreements and retention pools, or reduce price to replace talent.
- Compensation surprises: Use a closing statement true-up and indemnities for pre-close obligations.
Strategic fit and deal thesis questions
State why this target advances your strategy, then test the assumptions that must be true for the combined business to create value. Convert each lever into an owner, timeline, and KPI.
| Focus | Top questions | Success conditions | Red flags | Response |
|---|---|---|---|---|
| Seller motive | Why sell now; what would they do with 5 more years | Plausible, time-bound rationale | Vague or contradictory story | Reprice or walk |
| Market position | Competitive landscape and moats | Defensible niche, clear wedge | Price war exposure | Adjust growth plan |
| Synergies | Specific integration levers | Owner, timeline, KPI | Hand-wavy savings | Exclude from price |
Key questions to ask
- Why is the seller selling now, and who else passed on the deal and why?
- What must be true in 12 months to prove success, and who owns each lever and KPI?
- How does the target strengthen or expose your position over 3 to 5 years?
- Where is the walk-away line if core assumptions break?
Integration and Day 1/100 planning questions
Plan integration during diligence, not after close. Define Day 1 roles, first 30 to 90 days, and 12-month KPIs now, then make them conditions to close where needed.
| Focus | Top questions | Must-have by | Red flags | Response |
|---|---|---|---|---|
| TSA | What services do we need and for how long | Signed TSA before close | Unscoped dependencies | Holdback tied to exit |
| Leadership | Post-close org and decision rights | Named leaders Day 1 | Ambiguity in ownership | Delay close or re-scope |
| Comms | Customer and employee messaging | Drafts approved pre-close | Churn spike risk | Retention offers pre-close |
| KPIs | 12-month success metrics | Owner and cadence set | No baseline data | Data room build pre-close |
Key questions to ask
- What shared services, systems, or infrastructure need a transition services agreement, and what are exit milestones?
- Who leads what on Day 1, and how will decisions be made and documented?
- What customer communications are required at close, and who owns each relationship?
- Where is first-90-day churn risk, and what mitigation will be in place?
- What is the 100-day plan, and how will we track KPIs weekly?
Pre-LOI readiness and financing
Decide buy versus build, confirm financing capacity, and line up advisors before you sign an LOI. Budget third-party diligence so you can move fast and keep credibility with the seller.
| Focus | Top questions | Target state | Red flags | Response |
|---|---|---|---|---|
| Buy vs build | Time, cost, strategic fit | Clear TCO and timeline | No advantage to buy | Pause search |
| Financing | Equity, debt, cash capacity | Pre-vetted lender and covenants | Thin liquidity; harsh covenants | Re-size target |
| Advisors | QoE, legal, tax, tech, HR | Engagement letters ready | Last-minute scramble | Build bench now |
Typical advisor and financing costs
Budget external costs early so you can diligence with speed and confidence.
| Service | Average cost | Price range | Notes |
|---|---|---|---|
| Quality of earnings (QoE) | $25,000 | $15,000 to $60,000 | Complexity and data quality drive price |
| Legal diligence and purchase agreement | $40,000 | $25,000 to $100,000 | Higher for carve-outs or regulatory-heavy sectors |
| Tax diligence and structuring | $15,000 | $8,000 to $40,000 | Includes nexus and sales tax exposure |
| Tech and cybersecurity diligence | $20,000 | $10,000 to $50,000 | Pen tests and architecture reviews |
| HR and benefits diligence | $8,000 | $5,000 to $20,000 | Pay practices and compliance |
| SBA loan packaging and fees | $15,000 | $10,000 to $30,000 | Includes guarantee fee and closing costs |
Buyer financing readiness
- SBA: Prepare 3 years of personal and business tax returns, PFS, resumes, purchase agreement draft, business plan, projections, and collateral schedules. Expect covenants on DSCR and distributions.
- Conventional: Line up term sheets with leverage caps and interest rate scenarios. Model covenants and sensitivity cases before you bid.
- Equity: Align dilution and governance up front; confirm decision timelines to avoid LOI delays.
Read our SBA loan guide and connect with lenders in the Dealflow marketplace.
Deal structure, valuation, and working capital peg
Price using QoE-validated EBITDA or SDE, then set terms that share risk. Lock the working capital peg and assign integration costs before close so there are no surprises at funding.
| Focus | Top questions | Benchmarks | Red flags | Response |
|---|---|---|---|---|
| Valuation basis | EBITDA vs SDE normalization | Remove owner add-backs and one-offs | Aggressive add-backs | Independent QoE |
| Structure | Asset vs stock; earnout; seller note | Risk aligned to forecasts | All-cash with high uncertainty | Shift to contingent pay |
| Working capital | 12-month average peg | AR, AP, inventory normalized | Seasonality ignored | Monthly average peg |
| Indemnities | Cap, basket, survival | Escrow 5% to 10%, 12 to 24 months | No escrow proposed | Increase price protection |
Normalization checklist
- Remove one-time legal, consulting, and extraordinary repairs.
- Adjust for owner compensation, perks, and related-party transactions.
- Standardize revenue recognition and bad debt reserves.
- Split maintenance versus growth marketing and capex.
Common structures and costs
| Structure element | Typical range | When to use |
|---|---|---|
| Seller financing | 10% to 40% of price at 6% to 10% interest | Bridge valuation gaps; align post-close support |
| Earnout | 10% to 30% over 1 to 3 years | Forecast or concentration risk |
| Indemnity escrow | 5% to 10% for 12 to 24 months | Cover reps and warranties |
| Working capital adjustment | True-up vs peg at close | Seasonal or lumpy cash cycles |
Learn EBITDA vs SDE | Asset vs stock purchase | Working capital adjustments | Earnouts and seller financing
Sector-specific diligence addenda
Tailor your questions by vertical. Pressure-test metrics that correlate with durability and cash conversion in each sector, and reflect differences in working capital intensity.
| Sector | Key questions | KPIs to verify | Red flags |
|---|---|---|---|
| SaaS | Gross and net revenue retention; cohort behavior | NRR ≥ 100%; GRR ≥ 85% | High logo churn; weak expansion |
| Ecommerce | Channel mix, CAC payback, inventory risk | CAC payback ≤ 12 months; returns ≤ 5% | Heavy paid reliance; stockouts |
| Manufacturing | Capacity, OEE, scrap, supplier risk | OEE ≥ 70%; scrap ≤ 2% | Single-source inputs |
| Services | Backlog, utilization, WIP billing | Utilization ≥ 75%; backlog ≥ 3 months | Unbilled WIP spikes |
| Healthcare | Payer mix, reimbursements, compliance | Top payer ≤ 40%; AR aging healthy | Audits, recoupments |
Red flags and when to renegotiate vs walk
Decide early which findings trigger a reprice, restructure, or a walk-away. Document these thresholds in your LOI and align internal stakeholders before diligence ramps.
| Finding | Why it matters | Action |
|---|---|---|
| Customer concentration > 20% | Binary renewal risk | Earnout, seller note, or walk |
| Declining gross margins | Structural pricing or cost issue | Price cut and fix plan |
| Unusual revenue recognition | EBITDA unstable | QoE restatement or walk |
| Key person dependency | Continuity risk | Retention pool, escrow, or price cut |
| Undisclosed litigation or regulatory gaps | Tail risk | Special indemnity, escrow, or walk |
| Absence of clean documentation | Unknown unknowns | Delay close; tighten reps |
Due diligence checklist and document request list
Use this printable checklist to run initial and confirmatory diligence. Tailor to your thesis and walk-away lines, and update it as new risks emerge.
| Workstream | Top 5 questions | Documents to request | If bad, do this |
|---|---|---|---|
| Financial and commercial | 1) % recurring and churn; 2) concentration; 3) margin drivers; 4) DSO/turns; 5) capex split | 3 to 5 years financials, AR/AP aging, inventory, cohort and pipeline, QoE | Reprice, raise WC peg, add earnout |
| Legal and regulatory | 1) Assignability; 2) change-of-control; 3) litigation; 4) IP ownership; 5) tax compliance | Contracts, litigation docket, IP assignments, privacy docs, tax returns | Escrow, indemnity, or walk |
| Operations and technology | 1) Capacity; 2) suppliers; 3) quality; 4) tech debt; 5) cybersecurity | SOPs, OEE, supplier contracts, asset register, pen tests | Capex plan, TSA, holdback |
| People and culture | 1) Key person risk; 2) retention costs; 3) culture fit; 4) org structure; 5) compliance | Org chart, comp and benefits, policies, HR claims | Retention pool, price cut |
| Strategic fit and thesis | 1) Seller motive; 2) competitive position; 3) synergy levers; 4) 12-month KPIs; 5) walk-away | Market maps, competitor analysis, synergy models | Revise thesis or walk |
| Integration planning | 1) TSA scope; 2) leadership plan; 3) Day 1 comms; 4) 100-day plan; 5) churn mitigation | TSA draft, RACI, comms plan, roadmap, KPI dashboard | Delay close; add milestones |
| Real estate and insurance | 1) Rent escalations; 2) options; 3) assignment rights; 4) coverages; 5) claims history | Leases, amendments, COIs, loss runs | Landlord consent timing in timeline |
| Digital and intangible assets | 1) Domains; 2) websites; 3) analytics and ads; 4) marketplaces and social; 5) CRM and code | Admin access lists, transfer keys, IP filings, brand guides | Closing condition for transfer |
Post-close 100-day plan template
- Days 1 to 7: Stabilize operations, confirm cash controls, and launch customer and employee communications.
- Days 8 to 30: Stand up KPI dashboards, initiate TSA exits, and finalize retention offers.
- Days 31 to 60: Execute quick-win synergies and begin system migrations.
- Days 61 to 100: Review progress, adjust plan, and set next 12-month goals.
Download a 100-day plan template and find M&A advisors on Dealflow.
Frequently asked questions
Use these quick answers to tailor your diligence plan and stay focused on value drivers.
| Question | Short answer |
|---|---|
| What is due diligence? | A structured process to falsify your deal thesis and surface risks that affect price, terms, or integration. |
| How many questions should I ask? | Fewer, sharper questions tied to your thesis. Depth over breadth. |
| Initial vs confirmatory diligence? | Initial tests the thesis and major risks before LOI. Confirmatory validates the numbers and legal terms before close. |
| How do I evaluate culture? | Interview across levels, review engagement data, observe decision rights, and test for value alignment. |
| When should integration planning start? | In diligence. Define TSA needs, Day 1 comms, leadership, and 100-day KPIs before signing the definitive agreement. |
| Which red flags are walk-aways? | Non-assignable key contracts, unfixable compliance gaps, unreliable financials, or a broken culture with no retention path. |
Ready to apply this checklist? Browse vetted listings, build your data room, and connect with QoE firms, lenders, and M&A counsel through Dealflow. Explore more: Due diligence checklist | Lender marketplace | M&A advisor directory | Sector diligence guides
