Seller due diligence preparation is assembling and explaining the records a buyer will examine between the letter of intent and closing, before the buyer asks for them.
What will a buyer ask to see?
Everything that supports the price, in roughly the order a buyer's lender will ask for it. A buyer's due diligence is the examination of the business after a letter of intent is signed and before the purchase closes. From the seller's side it is a document request list, a deadline, and a set of questions the seller either answers with records or answers with a story. Records close deals. Stories reopen the price.
The buyer's side of the same process is in the buyer's due diligence checklist. This page is the other half: what a seller should have ready, and in what order, before the first request arrives.
What should be in the financial folder?
The core of every request list:
- 3 years of business tax returns and the year-to-date figures.
- Profit and loss statements and balance sheets for the same periods, prepared the same way each year.
- Bank statements for every business account, so a reviewer can trace reported revenue to deposits.
- A reconciliation of the statements to the tax returns, with every difference explained.
- The schedule of adjustments the seller claims, each with its source record. The seller's discretionary earnings guide explains what a buyer will accept as an adjustment and what they will challenge.
- Accounts receivable and payable aging, and a list of any debt that will be paid off at closing.
A buyer financing the purchase will have a lender check the seller's reported figures against the returns the seller filed with the IRS, often by requesting a tax transcript. A difference between the statements and the returns is one of the first things a lender questions. Find it first and write the explanation before anyone asks.
What operating records will a buyer want?
The records that show the business works without the seller:
- Customer lists with revenue by customer for the last 3 years, shared under a confidentiality agreement and in the level of detail the stage of the deal justifies.
- Supplier agreements and the terms that matter, including anything that requires consent to transfer.
- The lease and any obligation that follows the premises.
- Employee roster, roles, pay, and any agreements, without personal details beyond what the buyer's advisers need.
- Licenses and permits, and whether each one transfers or must be applied for again.
- The written processes that show how the work is done. The Run guide covers how to document and test them.
How is the sale reported for tax?
Both sides report it, and both sides must agree on how the price is allocated. When a group of assets that makes up a business is sold and goodwill could attach to it, the IRS requires both the seller and the buyer to file Form 8594, the asset acquisition statement. The allocation affects what each side pays in tax, so it is negotiated, and a seller who has not thought about it before the purchase agreement is negotiating it at the worst possible moment. Take the question to a tax adviser early.
What should a seller not hand over?
Anything before a confidentiality agreement is signed, and personal data beyond what the stage requires. A buyer at the letter of intent stage does not need employee home addresses or customer contact details. Share in layers: summaries first, detail after the letter of intent is signed and the buyer has shown it can finance the deal, and the most sensitive records last, often through the buyer's advisers rather than the buyer.
Keep a log of what was shared, with whom, and when. If the deal does not close, the log is what the confidentiality agreement is enforced against.
How should a seller prepare?
Build the folder now, before a buyer exists. Put the documents in the order above, write the explanation beside every number a stranger would question, and ask an accountant to read it as a buyer would. Then fix what the accountant finds.
A seller who can answer the first request list in a week sets the tone for the whole process. A seller who takes a month to find the bank statements teaches the buyer to distrust everything that follows. The sellability self-check shows where the evidence is thin, and the preparation guide covers what to do about it. None of this promises a sale or a price. It removes the reasons a sound business loses one.
Questions people ask next
When does due diligence happen in a business sale?
After the letter of intent is signed and before the purchase closes. A seller who prepares the folder before a buyer exists can answer the first request list quickly.
Will a buyer's lender check my tax returns?
A buyer who finances the purchase will usually have a lender compare your reported figures with what you filed with the IRS, often through a tax transcript. Explain every difference before it is found.
Do both sides report the sale to the IRS?
When the assets of a business are sold and goodwill could attach to them, the IRS requires both the seller and the buyer to file Form 8594, and the allocation of the price is negotiated.
What should I not share early?
Anything before a confidentiality agreement, and personal data about employees or customers beyond what the stage of the deal requires. Share summaries first and detail later.
Sources
- Internal Revenue Service, about Form 8594, asset acquisition statement Primary source. Read 2026-09-22.
- Internal Revenue Service, get your tax records and transcripts Primary source. Read 2026-09-22.
- U.S. Small Business Administration, close or sell your business Primary source. Read 2026-09-22.