Basic Due Diligence Checklist for Business Acquisitions
A practical framework for requesting, verifying and testing the information supplied by a seller before a purchaser commits to the acquisition of a business.
Checklist Snapshot
Purpose of the Due Diligence Investigation
The objective is not merely to collect documents, but to test whether the business performs as represented.
A business presentation may provide an overview of turnover, profitability, assets and operating structure. Due diligence is the process of confirming those representations by obtaining source documents and comparing them with the financial and operational picture presented to the purchaser.
Information Categories
The checklist groups the required information into practical due diligence categories.
Trading Verification
2 checklist items covering the documents and proof required for this part of the due diligence investigation.
Financial Verification
2 checklist items covering the documents and proof required for this part of the due diligence investigation.
Asset Verification
1 checklist item covering the documents and proof required for this part of the due diligence investigation.
Operational Verification
1 checklist item covering the documents and proof required for this part of the due diligence investigation.
Contractual Verification
1 checklist item covering the documents and proof required for this part of the due diligence investigation.
Legal Entity Only
3 checklist items covering the documents and proof required for this part of the due diligence investigation.
Recommended Review Process
A simple sequence for moving from seller information to a reasoned investment decision.
Verify turnover
Confirm actual sales against point-of-sale records, cash-up documentation and the seller’s presentation.
Confirm cost structure
Test purchases, expenses and gross profit margins to establish whether the declared profitability is sustainable.
Check operational obligations
Review staff, assets, leases, franchise agreements and other contracts that may transfer to the purchaser.
Decide with evidence
Clarify variances, renegotiate where appropriate, or proceed once the business has been properly verified.
| No. | Description | Category | Action / Information Required | Typical Proof | Priority | |
|---|---|---|---|---|---|---|
| 1 |
Actual sales generated in the business
|
Trading Verification | The Seller must provide computer printouts, point-of-sale reports, cash register slips or equivalent supporting documentation detailing the actual sales generated by the business. These records should correlate, both in timing and value, with the sales statistics and business presentation attached as annexures to the sale agreement. | POS reports / cash-up slips / sales summaries | Critical | |
| 2 |
Actual purchases that generated the sales in the business
|
Trading Verification | The Seller must provide written proof, including supplier invoices, purchase slips or other supporting documentation for purchases made by the business. These records should correlate, both in timing and value, with the sales statistics and business presentation attached as annexures to the sale agreement. | Supplier invoices / purchase records | Critical | |
| 3 |
Actual expenses of the business
|
Financial Verification | The Seller must provide written proof of all actual operating expenses reflected in the business presentation. The major items normally include rental, franchise fees where applicable, water and electricity, wages, salaries, banking fees, insurance, security, telephone and related operating costs. | Expense invoices / statements / payroll records | Critical | |
| 4 |
Actual margins for the different facets of the business
|
Financial Verification | The Seller must provide written proof of the margins presented in the business presentation, including gross profit margins for the relevant departments, product lines or operating divisions of the business. | Margin reports / cost-of-sales analysis | High | |
| 5 |
Actual assets in the business as detailed in Annexure A
|
Asset Verification | The Seller must provide proof that all assets are paid for. Where any equipment, vehicles, plant or fixtures are subject to lease, rental or hire-purchase agreements, copies of the relevant agreements must be provided to the Purchaser. | Asset list / paid-up confirmations / finance agreements | High | |
| 6 |
Actual personnel, salary details and years of service
|
Operational Verification | The Seller must provide a schedule of employee names, positions, remuneration, employment status and years of service, together with a breakdown of wages and salaries for at least the last three months of trading. This should correspond with the personnel schedule included as Appendix D to the sale agreement, where applicable. | Staff list / payroll records / service periods | High | |
| 7 |
Contractual agreements to be taken over
|
Contractual Verification | The Seller must provide copies of all agreements that may need to be taken over, assigned or renegotiated by the Purchaser, including lease agreements, hire-purchase agreements, rental contracts, franchise agreements, supplier agreements and any other material contracts. Follow-up discussions may then be required with the landlord, franchisor or relevant contracting parties. | Lease / franchise / HP / rental / supplier agreements | Critical | |
| 8 |
VAT payments and VAT returns, if applicable
|
Legal Entity Only | Where the legal entity is being acquired, the Seller must provide VAT returns and supporting VAT payment records for the last 12 months of trading, or for such other period as may be required during the due diligence investigation. | VAT201 returns / SARS payment confirmations | Conditional | |
| 9 |
Tax payments and tax compliance, if applicable
|
Legal Entity Only | Where the legal entity is being acquired, the Seller must provide proof that all business tax returns are up to date and that there are no outstanding payments, penalties or unresolved liabilities due to SARS. | Tax compliance status / SARS records | Conditional | |
| 10 |
Debtors, creditors and age analyses
|
Legal Entity Only | Where the legal entity is being acquired, the Seller must provide a complete list of debtors together with an age analysis, as well as a complete list of creditors together with negotiated payment terms and any material outstanding obligations. | Debtors age analysis / creditors list / payment terms | Conditional |
Typical Red Flags to Clarify
These issues do not automatically disqualify a transaction, but they must be understood and resolved.
Financial red flags
- Sales reports do not reconcile with cash-up records, VAT returns or bank deposits.
- Purchases do not support the reported turnover or declared gross profit margin.
- Major expenses are excluded, understated or treated as once-off without proper explanation.
- Margins differ materially from those represented in the business presentation.
Operational and legal red flags
- Assets are financed, leased or not owned by the seller despite being included in the transaction.
- Key staff costs, leave liabilities or service periods have not been disclosed clearly.
- Lease, franchise or supplier agreements cannot be transferred on acceptable terms.
- Outstanding SARS, VAT, debtor or creditor issues exist where the legal entity is being acquired.
Legal Entity Takeover
Additional information is required where the purchaser takes over the company, close corporation or legal entity itself.
If only the business assets are acquired, certain historical tax, VAT, debtor and creditor exposures may not transfer in the same way. Where the legal entity is acquired, the purchaser is effectively stepping into the shoes of that entity and must therefore review statutory compliance, SARS status, debtors, creditors and potential hidden liabilities with particular care.