Due Diligence: what it is, types and checklist for buying a business

Due diligence is the investigation that the buyer conducts before signing the purchase of a company or business: it confirms numbers, contracts, liabilities and how day-to-day operations function. It serves to validate what the seller presented, uncover hidden risks and negotiate price or conditions based on facts — not on good intentions.

In this article, you will find a clear definition, the types of due diligence most relevant to the purchase of SMEs in Portugal, when to carry it out in the process and a checklist practical by area (financial, tax, legal, labour, operational and commercial). After validating the business, you can explore opportunities for sale in the confidential marketplace of ComprarEmpresa.

Note: this content is purely informative and does not constitute legal, tax or accounting advice. For concrete decisions, always validate with qualified professionals.

What is due diligence in the purchase of a company?

Due diligence is the structured investigation process — financial, tax, legal, labour and operational — that the buyer conducts before purchasing a company or business, to confirm whether the seller's information corresponds to reality and to substantiate the price and conditions of the deal.

In practice, it works like visiting a house before buying it: from a distance, the business may seem solid; up close, cracks, debts or dependencies emerge that change the decision. The buyer (with an accountant and lawyer) requests documents, cross-references them with the actual operation and turns findings into decisions: proceed, renegotiate or withdraw.

Three central objectives:

1. Identify risks — liabilities, contingencies and dependencies that affect value or continuity.

2. Validate the seller's information — accounts, contracts, licenses and what was said during negotiations.

3. Justifying price and conditions — adjustments, guarantees, withholdings or clauses in the final contract.

The more organised the seller's documentation, the faster and more predictable the process runs. The lack of documents or evasive answers is, in itself, a warning sign.

Due diligence vs audit vs valuation

They are not the same thing, although they overlap:

• Due diligence — investigation aimed at the purchase decision: risk, consistency of information and conditions of the business.

• Audit — formal review of accounts (often by a statutory auditor), with its own scope and responsibility; it can feed into financial due diligence, but does not completely replace it.

• Valuation — estimates how much the business is worth. The numbers validated in due diligence feed into the valuation; the valuation alone does not replace diligence on liabilities and contracts. To delve deeper into the value aspect, see the business valuation simulator and guide and the tips for assessing the value of a business.

Types of due diligence

In a purchase of SMEs or business transfer in Portugal, the scope adapts to the size, sector and risk of the operation. The most common types — and those that most buyers should cover — are financial, tax, labour and legal/corporate. Depending on the business, others may be added (operational, commercial, technological, environmental).

Financial due diligence

Analyses whether the business earns what it claims to earn and whether profitability is sustainable. It includes financial statements, cash flow, debts, customer concentration and consistency between accounting, banks and tax returns. It is usually conducted or reviewed by an accountant or statutory auditor, in coordination with the buyer.

Tax due diligence

Checks the situation with the Tax Authority and Social Security, VAT and corporate income tax declarations, withholdings, inspections or ongoing processes and obligations related to tax benefits. Tax contingencies can weigh particularly heavily when acquiring the company (shares), not just the establishment.

Labour due diligence

Evaluates employment contracts, categories and seniority, remuneration and contributions to Social Security, liabilities with personnel (holidays, bonuses, potential compensations) and the dependency on key employees. It is one of the most underestimated areas by first-time buyers — and one that generates the most surprises after the deed.

Legal / corporate due diligence

Confirms the ownership and commitments of the company: permanent certificate, articles of association, minutes and shareholders' agreements; contracts with clients and suppliers (including change of control clauses); licenses and permits; ongoing or potential litigation. The buyer's lawyer usually leads this aspect.

Other types (brief)

Depending on the sector and the risk, it may make sense to broaden the scope:

• Operational — processes, stock, IT and owner dependency.

• Commercial — client portfolio, retention, leasing and intangibles (brand, domain).

• Technological — systems, software licenses, data and digital continuity.

• Environmental / regulatory — when the activity requires it (sectoral licenses, regulatory compliance).

Do not invent 'universal' obligations: what is essential in a restaurant is not the same in a software house. Adapt the scope with professionals familiar with the sector.

When to conduct due diligence in the purchase process?

Due diligence is carried out after there is serious interest and access to information (usually under confidentiality / NDA, letter of intent or equivalent) and before the final contract or deed. It is in this window that you can still renegotiate the price, demand guarantees or withdraw without being definitively bound.

Fits into the overall process of buying a company: interest → confidentiality and analysis → diligence → final negotiation → closing. The guide how to buy a company describes the funnel without replacing this checklist.

Transfer vs purchase of shares/company: the objective (to validate risk) is the same, but the set of documents and liabilities changes. In a transfer, the focus is more on the establishment, contracts and licenses of the business; in the purchase of a company, the corporate structure, contingencies of the legal entity and broader history come into play. Compare the approaches in business transfer vs company purchase and in the hub of business transfer — and seek professional advice on the structure you are negotiating.

Due diligence checklist by area

Each business has its own risks, but there are six areas that should almost always be covered. Request supporting documents, cross-check them with the day-to-day reality and record in writing what you find: this record supports renegotiation and the clauses of the contract.

Use the list as a starting point and adapt it to the size and sector. For tax, legal or accounting decisions, validate with qualified professionals.

1. Financial and accounting

This is the starting point: it confirms whether the business actually earns what it claims to earn and whether the profitability is sustainable.

• Financial statements from the last 3 to 5 years (balance sheet and income statement).

• Cash flow and seasonality of revenue throughout the year.

• Margins by product or service and their evolution over time.

• Debts, loans, leases and guarantees provided.

• Accounts receivable (ageing and risk of bad debts) and accounts payable.

• Dependence on a few clients or suppliers in billing.

• Consistency between accounting, bank statements and tax returns.

The validated numbers here are the basis for the price that makes sense to pay — then, cross-check with the business valuation.

2. Tax

Tax debts and contingencies can affect the business, especially when purchasing the company. Confirm the situation with the support of an accountant or statutory auditor.

• Regularised situation with the Tax Authority and Social Security.

• VAT, corporate tax and withholding tax declarations submitted and paid.

• Any ongoing processes, inspections or tax debts.

• Tax benefits used and the obligations associated with their maintenance.

3. Legal and corporate

This confirms who owns what and what commitments the company has undertaken — including clauses that may be triggered by a change of ownership.

• Permanent certificate and updated corporate structure.

• Articles of association, minutes and any shareholders' agreements.

• Contracts with customers, suppliers and partners (and change of control clauses).

• Licences, permits and authorisations necessary for the activity.

• Ongoing or potential litigation or legal proceedings.

4. Employment

Labour due diligence assesses commitments to employees and the liabilities that accompany them — one of the most underestimated areas by first-time buyers.

• Employment contracts, categories and seniority of employees.

• Remunerations, allowances and obligations with Social Security.

• Liabilities with personnel (unpaid holidays and allowances, potential compensations).

• Dependence on key employees and risk of departure after the sale.

5. Operational

Measures whether the business operates without the current owner and the condition of the means that generate revenue.

• Internal processes, critical suppliers and supply chain.

• Condition of equipment, stock and facilities.

• IT systems, software licences and data management.

• Dependence on the current owner in day-to-day operations.

6. Commercial, customers and intangible assets

The value of many businesses lies in the customer base and the brand — assets that are only confirmed by looking at the data.

• Customer concentration and retention or recurrence rate.

• Lease agreement and conditions of the space (if applicable).

• Brand, domain, social media and online reputation.

• Trademarks, patents and copyrights duly registered (when they exist).

Common mistakes to avoid

Even with a checklist, there are recurring failures:

• Relying only on verbal — what the seller says without supporting documents is not enough.

• Focusing only on finances — ignoring labour, tax and legal aspects leaves liabilities undetected.

• Underestimating the owner's dependency — if the business 'is' the person selling, the post-purchase value may drop.

• Not formalising in writing — promises from negotiations should be included in the contract (statements, guarantees, conditions).

A well-conducted due diligence helps to reduce the common risks in buying businesses.

Who to involve and how long does it take?

A serious due diligence usually involves:

• Accountant or ROC — financial and tax axis.

• Lawyer — legal and corporate axis (and contract review).

• Sector consultants — when the activity has particularities (IT, health, industry, etc.).

The deadline it depends on the size of the business and the quality of the documentation: from a few weeks (organised SME, complete information) to several months (larger businesses or missing documentation). Avoid generic 'average deadlines': ask your advisor for a work plan based on the actual scope.

The cost depends on the scope and the professionals. Request a quote for the areas you want to cover. As a rule, the initial investment is lower than the cost of inheriting an undetected liability — but there is no single 'market' price valid for all cases. If you are mapping the overall cost of a transaction, the article how much does it cost to buy a business helps to frame the process (without replacing professional budgets).

And after the due diligence?

The conclusions are not a stamp of 'approved' or 'rejected'. They serve to decide:

1. Renegotiate — price, payment schedule, withholdings or adjustments based on findings.

2. Demand contractual protections — representations and warranties, indemnities, suspensive conditions, when it makes sense in the agreement.

3. Withdraw — if the risk is unbearable or the seller does not want to reflect it in the business.

Due diligence is not a formality: it is what separates an informed purchase from an expensive surprise. If the diligence goes well and you want to proceed, see how buying works in the marketplace or the guide how to buy a company.

Frequently asked questions about due diligence

What is due diligence in the purchase of a company?

It is the investigation process that the buyer conducts on the business before purchasing, to verify the financial, tax, legal, labour and operational situation. It serves to confirm the seller's information, identify risks and substantiate the price and conditions of the purchase. It does not replace professional advice on your specific case.

What are the main types of due diligence?

The most common in the purchase of SMEs in Portugal are financial, tax, legal/corporate and labour. Depending on the business and the sector, operational, commercial, technological and environmental or regulatory may also be included. The scope should adapt to the risk of the transaction, with support from qualified professionals.

What does a labour due diligence include?

It analyses employment contracts, categories and seniority of employees; remuneration and obligations with Social Security; liabilities with personnel (holidays, overdue bonuses, potential indemnities); and the dependence on key employees who may leave after the sale. It is a critical area and often underestimated in the first purchase.

When should due diligence be carried out?

After there is serious interest and access to information (typically under confidentiality) and before signing the final contract or deed. Only at this stage can you still renegotiate terms or withdraw based on the findings, without being definitively bound.

How long does due diligence take?

It depends on the size of the business and the quality of the documentation provided. In a well-organised SME, it can be completed in a few weeks; in larger operations or with missing information, it can extend over several months. The more complete the seller's file, the faster and more predictable the process runs.

Who should carry out due diligence?

It is conducted by the buyer, usually with an accountant or ROC (financial and tax) and a lawyer (legal and corporate), and may include sector consultants. The conclusions should be validated by qualified professionals before making tax, legal, or accounting decisions.

Is it worth proceeding if due diligence finds problems?

Finding problems does not require withdrawal. Often, the findings serve to lower the price, demand guarantees, or share responsibilities in the contract. Withdraw when the risk is unbearable or the seller refuses to reflect those risks in the terms of the deal.

Is due diligence in a transfer the same as buying a company?

The objective — to validate risk and information — is the same, but the set of documents and liabilities changes with the structure (assets/establishment versus shares or stocks). Compare transfer and company purchase in the guides on the site and seek professional advice on the structure you are negotiating.

What documents should be requested first?

Start with recent financial statements, status with the tax authority and social security, permanent certificate, key contracts, and a list of employees. Then delve deeper by area with the checklist in this article. The exact order depends on the sector and what the seller can provide under confidentiality.

Does due diligence replace business valuation?

No. Due diligence validates risk and coherence of information; valuation estimates the value. Ideally, both should be used: validated numbers and risks feed into a reasoned price. Explore the business valuation without treating the result as a guarantee of market price.

Next step

If you already have a business in mind — or want to start looking with clear criteria — see businesses for sale or contact the team for confidential support. You can also create an account to track opportunities in the marketplace.