Due Diligence Checklist for Buying a Business in India

Due diligence is the process of verifying everything the seller has told you—and discovering what they haven't. Skip it at your peril.

Why Due Diligence Matters in India

The Indian SMB market has unique characteristics that make thorough due diligence essential:

• Cash-based transactions may not appear in official records
• Family businesses often have informal arrangements
• Compliance gaps are common and can become your liability
• Property titles can be complex

The Master Checklist

Financial Due Diligence

Tax Returns & Compliance

• [ ] Income Tax Returns (ITR) for 3-5 years
• [ ] GST returns and reconciliation with books
• [ ] TDS returns and challans
• [ ] Professional tax compliance
• [ ] Any pending assessments or disputes

Financial Statements

• [ ] Audited Balance Sheets (3 years)
• [ ] Profit & Loss statements
• [ ] Cash flow statements
• [ ] Accounts receivable aging
• [ ] Accounts payable aging

Banking & Cash

• [ ] Bank statements (24 months minimum)
• [ ] Reconcile bank deposits with reported revenue
• [ ] Check for bounced cheques (inward/outward)
• [ ] Verify cash on hand
• [ ] Outstanding loans and facilities

Legal Due Diligence

Entity & Ownership

• [ ] Company registration documents (MoA, AoA)
• [ ] Shareholder agreements
• [ ] Board resolutions
• [ ] Register of directors and members
• [ ] Any pending or past litigation

Contracts & Agreements

• [ ] Customer contracts (especially large accounts)
• [ ] Supplier agreements
• [ ] Lease agreements
• [ ] Equipment financing
• [ ] Non-compete and confidentiality agreements

Intellectual Property

• [ ] Trademark registrations
• [ ] Domain name ownership
• [ ] Any patents or copyrights
• [ ] Licensed software

Operational Due Diligence

Employees

• [ ] Employee list with roles and tenure
• [ ] Employment contracts
• [ ] PF and ESI compliance
• [ ] Gratuity provisions
• [ ] Key person dependencies

Customers

• [ ] Top 10 customer list with revenue share
• [ ] Customer concentration analysis
• [ ] Customer contracts and terms
• [ ] Recent customer feedback or complaints
• [ ] Churn/retention rates

Suppliers & Vendors

• [ ] Key supplier list
• [ ] Payment terms and history
• [ ] Alternative supplier options
• [ ] Any exclusivity arrangements

Property & Assets

Real Estate (if included)

• [ ] Title deeds and chain of ownership
• [ ] Encumbrance certificate
• [ ] Property tax receipts
• [ ] Approved building plans
• [ ] Occupancy certificate

Equipment & Inventory

• [ ] Fixed asset register
• [ ] Physical verification of assets
• [ ] Maintenance records
• [ ] Inventory count and valuation
• [ ] Obsolete stock identification

Regulatory Compliance

Licenses & Permits

• [ ] Shop & Establishment registration
• [ ] Trade license
• [ ] Industry-specific licenses
• [ ] Pollution clearance (if applicable)
• [ ] Fire safety certificate
• [ ] FSSAI (for food businesses)

Red Flags to Watch For

🚩 Financial Red Flags

• Revenue that doesn't match GST returns
• Unusual related-party transactions
• Sudden improvement in recent financials
• Missing or inconsistent records

🚩 Legal Red Flags

• Pending litigation not disclosed
• Unclear property titles
• Missing regulatory approvals
• Restrictive contract clauses

🚩 Operational Red Flags

• Key employees planning to leave
• Customer concentration >30% in one account
• Supplier dependencies
• Deferred maintenance

Creating Your Due Diligence Team

For acquisitions above ₹50 lakhs, consider:

| Professional | Role | Typical Cost | |-------------|------|--------------| | Chartered Accountant | Financial verification, tax review | ₹30-75K | | Lawyer | Legal documents, contracts | ₹25-50K | | Industry Expert | Operations assessment | ₹20-40K | | Property Valuator | Real estate (if included) | ₹15-25K |

Timeline and Process

Week 1-2: Document collection and preliminary review
Week 3-4: Detailed analysis and site visits
Week 5-6: Expert consultations and issue resolution
Week 7-8: Final report and negotiation of findings

After Due Diligence

Your findings will typically result in one of three outcomes:

1. Proceed as planned (clean diligence)
2. Renegotiate terms (manageable issues)
3. Walk away (deal-breaker issues)

Never feel pressured to proceed if due diligence reveals serious concerns. Walking away is better than buying problems.