The due diligence checklist for owners selling to private equity

What is due diligence when you sell your business?

Due diligence is the buyer’s detailed review of your company before it closes the purchase. The buyer checks that what you said about your business is true. It starts after you sign a letter of intent and ends when both sides sign the purchase agreement.

First Citizens Wealth, a bank advisory group, described the process in 2026 as “often rigorous” and said it “can consume a considerable amount of time from you and your executive team.” That matches what owners report. Plan for it like a second job.

Think of diligence as three things at once:

• A fact check on your numbers, customers and contracts.
• A risk search for anything that could change the price.
• A planning step, where the buyer starts to shape the first year after closing.

You can control a lot of it. Owners who know what buyers ask for can collect documents ahead of time, fix small problems and tell the buyer about known issues first.

What are the five diligence workstreams?

Private equity buyers split diligence into five parts: financial, operations, tax, HR and benefits, and legal. Alpine Investors, a private equity firm, listed these five workstreams in 2025. Expect each one to have its own team and its own request list.

The sections below walk through each one and give you a checklist.

What does the financial review look for?

The financial review tests whether your earnings are accurate and repeatable. A third-party accountant usually runs a quality of earnings study. It rebuilds your profit from source records and checks every add-back you claim.

Alpine Investors says most private equity buyers ask to see three years of revenue broken down by service or product, net income, and EBITDA. They also look at revenue composition, such as sales by business line or customer. For a services company, that often means how much revenue is contracted and recurring versus one-time work.

Financial checklist:

1. Three years of income statements, balance sheets and cash flow statements.
2. Monthly profit and loss statements for the current and prior year.
3. A bridge from net income to adjusted EBITDA, with proof for each add-back.
4. Revenue by customer, product and service line.
5. Accounts receivable and payable aging reports.
6. A working capital history by month.
7. Debt schedules and any off-balance-sheet obligations.
8. Budget and forecast, with the assumptions behind them.

Owner pay and personal expenses deserve extra care. Buyers accept add-backs they can prove. They reject add-backs that look like guesses. Our quality of earnings guide explains how that review works.

What does the operations review cover?

The operations review shows the buyer how your company actually delivers its work. It asks who does what, which systems run the business and where the weak points sit. Alpine Investors notes that buyers may also offer thoughts at this stage on growth opportunities and hiring.

Operations checklist:

• An organization chart with names, titles and tenure.
• A list of your top 20 customers and your top 20 suppliers.
• Written processes for sales, delivery, billing and customer support.
• A list of software systems, who owns each license and what each costs.
• Facility and equipment lists, including leases and maintenance records.
• Customer retention and churn data by year.
• Quality, safety and service metrics you already track.

Buyers look hard at key-person risk. If customers, pricing or technical knowledge sit with you alone, say so, and show how you plan to spread that load. Our guide to retaining management and key employees covers that topic.

What do buyers check for tax?

Tax diligence looks for unpaid taxes, filing mistakes and structure choices that affect the deal. Alpine Investors says it performs “a tax review at the local, state, and federal levels” and uses the result to help decide the transaction structure.

Tax checklist:

1. Federal, state and local income tax returns for the past three to five years.
2. Sales and use tax filings, if you sell taxable goods or services.
3. Payroll tax filings and proof of deposits.
4. Records of any audits, notices or open disputes.
5. Your entity type and ownership history.
6. Any elections you made with the IRS.

Tax rules change with your entity type and how the deal is structured. Ask your own tax adviser how the sale, any rollover equity and any later payments will be taxed before you agree to terms. This guide does not give tax advice.

What do buyers check for HR, benefits and legal matters?

Buyers review your people costs and your contracts because both carry risk that does not show up in the profit and loss statement. Alpine Investors says its legal review covers “customer, employee, supplier, and other key contracts,” and that it works with you and your counsel to finalize the purchase agreement.

HR and benefits checklist:

• Employee census with title, pay, start date and location.
• Offer letters, employment agreements and non-compete or non-solicit terms.
• Bonus, commission and incentive plans.
• Health, retirement and other benefit plans, and insurance policies.
• Any wage-and-hour claims, complaints or open investigations.

Legal checklist:

1. Articles of incorporation or organization, operating agreement or bylaws, and cap table.
2. Customer contracts, with change-of-control and termination clauses highlighted.
3. Supplier and lease agreements.
4. Licenses, permits and certifications.
5. Intellectual property records, such as trademarks and software ownership.
6. Pending or threatened lawsuits and past settlements.
7. Insurance claims history.

Contract clauses that let a customer cancel when ownership changes matter a great deal. Find them before the buyer does.

How do you build a data room?

A data room is a secure online folder where you store every document the buyer may request. Build it before the process starts. A well-organized room cuts back-and-forth, protects confidentiality and tells the buyer that you run a careful company.

Use this structure:

Tips that save time:

• Name files clearly and keep one version of each document.
• Sign a non-disclosure agreement before you share sensitive financial data. Alpine Investors says it can execute a standard NDA first.
• Name one person on your side to receive and route requests.
• Log what you share and when.
• Keep customer names hidden until late in the process if the buyer will accept that.

What happens during the exclusivity period?

The exclusivity period is the window after you sign the letter of intent when you agree not to talk to other buyers. Alpine Investors says once the LOI is signed, the firm will usually enter an exclusivity period “during which you cannot entertain other acquisition proposals for some period of time.”

That clause shifts leverage to the buyer. If diligence turns up a problem, you cannot easily go back to a second bidder. So prepare first, and read the exclusivity terms with your lawyer before you sign. Ask three questions:

1. How long is the exclusivity period, and can the buyer extend it alone?
2. Is the price binding, or can it change after diligence?
3. What happens if the buyer walks away?

Our guide to the letter of intent covers these terms in detail.

How should you check the buyer?

Diligence runs both ways, and you should treat it that way. First Citizens Wealth says “Presale due diligence works both ways” and that you “must thoroughly vet your buyer while preparing your own operations for comprehensive scrutiny.”

Ask the buyer:

• Who will lead the deal, and who will sit on your board?
• How much of the price is cash at closing, and how much is rolled equity or paid later?
• What role do they expect you to hold on day one, and in year three?
• Can you speak to founders of companies they have acquired?
• What plan do they have for your employees?

Our guide on how to choose a private equity partner gives a longer question list.

How do you prepare so diligence goes faster?

Start 12 to 24 months before you plan to sell, if you can. Early work is cheaper than rushed work. Our guide to preparing your company for a private equity sale lays out the full plan.

A quick readiness check:

• Do your financials close each month within a few weeks?
• Can you support every add-back with a document?
• Are your top customer contracts signed and current?
• Does anyone besides you know how key processes work?
• Do you have a lawyer and an accountant who handle deals?

Fix the gaps you find. Disclose the ones you cannot fix. Buyers plan around known problems. They pull back from hidden ones.

Next step

Capstreet’s investment criteria are on the deal criteria page, and you can read how a sale works on our page about selling your business to private equity. If you want a confidential conversation, call 713-332-2700 or email connect@capstreet.com, or use the contact page.