Due Diligence: What Buyers Will Ask For When Buying Your Business

You've signed a Letter of Intent with a buyer. Now comes due diligence—the process where the buyer thoroughly investigates your business before committing to the final purchase.

Due diligence can be overwhelming. Buyers will request hundreds of documents, ask probing questions, and scrutinize every aspect of your business. But if you're prepared, due diligence can actually strengthen your position by demonstrating you've run a well-organized business.

This guide covers what to expect and how to prepare for due diligence when selling your business in India.

What Is Due Diligence?

Due diligence is the buyer's investigation period—their chance to verify everything you've told them and uncover anything you haven't.

The buyer's goals:

• Verify financial performance claims
• Identify risks and liabilities
• Understand operational reality
• Confirm legal compliance
• Validate valuation assumptions
• Find negotiating leverage

Your goals:

• Demonstrate a well-run business
• Build buyer confidence
• Minimize surprises that could derail the deal
• Limit post-closing exposure (warranties, indemnities)
• Close the deal efficiently

Typical duration: 4-8 weeks for SMEs; longer for complex businesses

Types of Due Diligence

Financial Due Diligence

Focus: Are the numbers real? What are the true economics?

Who conducts: Buyer's CA firm, often Big 4 or mid-tier firm

What they examine:

• Historical financial statements (3-5 years)
• Quality of earnings analysis
• Working capital trends
• Customer and product profitability
• One-time vs. recurring items
• Revenue recognition practices
• Related-party transactions
• Tax positions and disputes

Legal Due Diligence

Focus: What legal risks exist? Are agreements transferable?

Who conducts: Buyer's law firm

What they examine:

• Corporate structure and governance
• Contracts and commitments
• Litigation and disputes
• Intellectual property
• Real estate and property
• Regulatory compliance
• Employee matters

Operational Due Diligence

Focus: How does the business actually work?

Who conducts: Buyer's operations team or consultants

What they examine:

• Production processes and capacity
• Technology and systems
• Supply chain and vendors
• Quality and customer satisfaction
• Organizational structure
• Key person dependencies
• Scalability potential

Commercial Due Diligence

Focus: What's the market outlook? Is growth realistic?

Who conducts: Buyer's strategy team or market research firm

What they examine:

• Market size and trends
• Competitive positioning
• Customer analysis
• Sales and marketing effectiveness
• Product roadmap
• Growth opportunities

HR Due Diligence

Focus: What's the workforce situation?

Who conducts: Buyer's HR team or consultants

What they examine:

• Employee roster and compensation
• Employment contracts and policies
• Compliance (PF, ESI, labour laws)
• Pending disputes or issues
• Key person retention
• Culture assessment

Environmental Due Diligence

Focus: Are there environmental liabilities?

Who conducts: Environmental consultants

What they examine:

• Regulatory compliance
• Pollution control consents
• Hazardous materials handling
• Historical contamination
• Remediation requirements

The Due Diligence Request List

Here's a typical comprehensive due diligence request list. Not every buyer will ask for everything, but be prepared.

Corporate and Legal

Basic corporate documents:

• Certificate of incorporation
• Memorandum and Articles of Association
• All amendments and shareholder resolutions
• Board meeting minutes (last 3-5 years)
• Shareholder register and share certificates
• Shareholder agreements
• Any powers of attorney granted

Organizational:

• Current organizational chart
• List of all entities (subsidiaries, affiliates)
• List of directors and their other directorships
• Details of all related parties

Financial

Audited financials:

• Audited accounts (last 5 years)
• Management accounts (current year monthly)
• Detailed trial balance
• Audit reports and management letters
• Adjusting journal entries schedule

Revenue analysis:

• Revenue by customer (top 20 customers, 3 years)
• Revenue by product/service
• Revenue by geography
• Pricing history and policies
• Significant won/lost contracts
• Pipeline or backlog

Cost analysis:

• Cost breakdown (fixed vs. variable)
• Cost by department or function
• Major vendor spend analysis
• Overhead allocation methodology

Working capital:

• Aged receivables listing
• Bad debt history and policy
• Inventory listing and aging
• Aged payables listing
• Working capital cycle analysis

Cash and debt:

• Bank statements (12 months)
• Loan agreements and facilities
• Security/collateral details
• Interest rate information
• Covenants and compliance

Projections:

• Budget for current year
• Forecasts/projections (if available)
• Assumptions underlying projections
• Capital expenditure plans

Tax

Direct tax:

• Income tax returns (5 years)
• Assessment orders and appeals
• Pending notices or disputes
• MAT credit and other carryforwards
• Transfer pricing documentation (if applicable)

Indirect tax:

• GST returns (since implementation)
• GST assessments and disputes
• Old tax matters (service tax, VAT, excise)

Other taxes:

• Professional tax compliance
• Property tax receipts
• Customs matters (for importers)

Contracts

Customer contracts:

• Standard terms and conditions
• Major customer contracts
• Long-term agreements
• Any contracts with change of control provisions
• Customer concentration analysis

Supplier contracts:

• Major supplier agreements
• Long-term supply agreements
• Exclusivity arrangements
• Contracts with termination provisions on sale

Other contracts:

• Service agreements (IT, professional services)
• License agreements (software, IP)
• Joint venture or partnership agreements
• Distribution or agency agreements
• Confidentiality agreements (signed with third parties)

Employees

Workforce information:

• Employee list (name, role, tenure, compensation)
• Organization chart
• Department-wise headcount history
• Contractor and consultant list

Compensation:

• Salary structures and bands
• Bonus and incentive schemes
• Stock options or phantom equity
• Benefits summary (insurance, retirement)
• Compensation benchmarking

Compliance:

• PF registration and returns
• ESI registration and returns
• Labour law compliance certificates
• Factory license (if applicable)
• Shops and establishment registration

Employment matters:

• Standard employment contracts
• Key employee contracts
• Non-compete and non-solicit agreements
• Pending or threatened disputes
• Union agreements (if applicable)

Property and Assets

Real estate:

• Property ownership documents
• Lease agreements
• Rent receipts and payment history
• Property tax receipts
• Encumbrance certificates
• Layout approvals and building plans
• Occupancy certificates

Equipment:

• Fixed asset register
• Major equipment specifications
• Maintenance records
• Equipment under lease or HP
• Insurance coverage

Intellectual Property

Registrations:

• Trademark registrations
• Patent registrations
• Copyright registrations
• Domain names

Protection:

• IP assignment agreements from employees/contractors
• License agreements (in and out)
• Any IP disputes or challenges

Regulatory and Compliance

Business licenses:

• Trade licenses
• Industry-specific licenses
• Import/export licenses
• FSSAI (food), Drug licenses, etc.
• BIS or other certifications

Environmental:

• Consent to Operate
• Environmental clearances
• Pollution control compliance
• Hazardous waste authorization

Other:

• Competition law compliance
• Data protection practices
• Anti-bribery policies

Litigation

Pending matters:

• List of all pending litigation
• Details and current status
• Potential exposure assessment
• Insurance coverage

Threatened claims:

• Demand notices received
• Disputes that might become litigation
• Regulatory investigations

Historical:

• Significant concluded litigation
• Settlements in past 5 years

Insurance

Current coverage:

• All insurance policies
• Claims history (5 years)
• Upcoming renewals
• Key exclusions or limitations

How to Prepare for Due Diligence

Start Early (6+ Months Before Sale)

Organize your documents:

• Create comprehensive file system
• Gather all corporate records
• Collect all contracts
• Compile employee information
• Pull together compliance certificates

Fill the gaps:

• Identify missing documents
• Recreate what you can
• Note what can't be found
• Start processes to obtain missing items

Clean up issues:

• Resolve pending compliance matters
• Close out minor disputes
• Update expired documents
• Address known problems

Create a Data Room

Set up virtual data room:

• Choose appropriate platform
• Organize folders logically
• Index documents clearly
• Implement access controls

Populate systematically:

• Upload documents in organized fashion
• Name files clearly
• Ensure documents are readable
• Check for completeness

Prepare a Disclosure Letter

The Disclosure Letter accompanies the purchase agreement and discloses exceptions to the warranties you give:

What it covers:

• Known issues or problems
• Matters that qualify your warranties
• Items you want the buyer to accept "as is"

Why it matters:

• Limits your post-closing liability
• Forces you to think through issues
• Demonstrates transparency

During Due Diligence

Managing the Process

Assign an internal lead:

• Single point of contact for buyer
• Coordinates internal responses
• Tracks requests and status
• Flags issues for your advisors

Respond promptly:

• Set target response times
• Don't let requests pile up
• Delays create suspicion
• Show you're organized

Keep records:

• Log all requests and responses
• Document what you provided
• Keep copies of everything
• Note any verbal discussions

Handling Difficult Requests

If you don't have a document:

• Be honest: "This document doesn't exist"
• Explain why (verbal agreement, never documented, etc.)
• Offer alternatives (emails, informal records)

If a document reveals problems:

• Don't hide it (it will surface eventually)
• Provide context
• Have explanation ready
• Show how it's been addressed

If request is unreasonable:

• Discuss with buyer
• Explain why it's problematic
• Offer alternatives
• Don't be obstructionist

Protecting Confidentiality

Customer information:

• Remove customer names from early documents
• Provide customer detail only after LOI
• Require additional NDA provisions
• Monitor for competitor activity

Trade secrets:

• Stage release of sensitive information
• Hold most sensitive until right before closing
• Document what's shared
• Ensure destruction of materials if deal fails

Common Due Diligence Findings

Findings That Kill Deals

Major misrepresentation:

• Financial statements significantly wrong
• Hidden debts or liabilities
• Undisclosed litigation with major exposure
• Fraudulent activity

Unresolvable issues:

• Key licenses can't be transferred
• Major customer departing
• Fatal regulatory problem
• Unsolvable ownership dispute

Findings That Reduce Price

Financial adjustments:

• EBITDA lower than represented after normalizations
• Working capital issues
• Aggressive revenue recognition
• Unfunded liabilities (gratuity, leave)

Risk factors:

• Pending litigation with exposure
• Tax disputes with potential liability
• Compliance gaps requiring remediation
• Customer concentration higher than expected

Findings That Change Deal Structure

Liability concerns:

• Buyer prefers asset sale to avoid liabilities
• Indemnity requirements increase
• Escrow amount increases
• Representation period extends

Timing issues:

• Regulatory approvals needed
• Third-party consents required
• License transfers to be completed

After Due Diligence

The Due Diligence Report

Buyer's advisors will prepare a due diligence report:

What it contains:

• Summary of findings
• Key issues and risks
• Quantified exposures
• Recommendations for deal terms

How it's used:

• Basis for price negotiations
• Input to final agreements
• Determines warranty/indemnity provisions
• Identifies conditions to closing

Addressing Findings

Negotiation points:

• Purchase price adjustments
• Escrow or holdback amounts
• Specific indemnities
• Warranty scope and survival
• Conditions to closing

Your approach:

• Understand each finding fully
• Assess real vs. perceived risk
• Have responses prepared
• Pick your battles wisely

Due Diligence Checklist for Sellers

Before listing:

• All corporate documents organized
• Financial statements for 5 years compiled
• Tax returns and assessments available
• Major contracts collected
• Employee information documented
• Property documents in order
• Compliance certificates current
• Known issues identified and documented

During marketing:

• Data room set up and populated
• Index and navigation clear
• Access controls configured
• Sensitive information protected
• Response team identified

During due diligence:

• Request log maintained
• Response times tracked
• Issues flagged to advisors
• Follow-up questions addressed
• Management presentations prepared

After due diligence:

• Findings list reviewed
• Responses to issues prepared
• Disclosure letter drafted
• Negotiation strategy for findings

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Preparing for due diligence? We help Indian business owners get their houses in order and navigate buyer investigations successfully. Contact us to ensure your sale goes smoothly.