Due diligence on a lower-middle-market business typically runs 60–120 days after a signed letter of intent and moves through five stages — LOI, financial and Quality of Earnings review, commercial diligence, operational and legal diligence, and final terms — with most deals dying in the financial and commercial stages. Understanding the order matters, because each stage tests a different part of your business, and the gaps a buyer finds don't get negotiated — they get priced, or they end the deal.
How long does due diligence take?
For businesses under $5M EBITDA, expect roughly 60–120 days from a signed LOI to close, though complex or unprepared deals run longer. The single biggest variable isn't deal size — it's readiness. A business that can answer questions quickly with clean documentation moves fast; one that scrambles to assemble records stalls, and stalled deals lose momentum and die. (The full exit readiness checklist →)
Letter of Intent (LOI)
The buyer commits to explore the deal on headline terms — a price (usually a range or a multiple), a rough structure, and an exclusivity period. The LOI is non-binding on price, which is the part owners forget: everything in the LOI is provisional until diligence confirms it. The headline number you celebrate here is the number a buyer spends the next 90 days trying to verify or reduce.
Financial diligence and Quality of Earnings
This is where the most deals collapse. A buyer verifies your normalized earnings line by line in a Quality of Earnings (QoE) review: testing add-backs, revenue recognition, margins, and working capital. Un-clean books, undocumented add-backs, and lumpier-than-presented earnings get corrected downward — commonly 20–30%. Because price is a multiple of earnings, the offer falls with it. (What a Quality of Earnings review tests →) · (Add-backs that survive diligence →)
Commercial diligence
The buyer pressure-tests the durability of your revenue: customer concentration, contract terms, churn, pipeline quality, and whether customers are loyal to the company or to the owner. This is where owner dependency and concentration surface as real numbers rather than reassurances. (Why revenue concentration is the fastest multiple killer →)
Operational and legal diligence
The buyer confirms the business can actually transfer and run under new ownership: documented operations, key-person dependencies, then the legal layer — contracts, IP ownership, leases, licenses, litigation, and change-of-control clauses. Non-assignable contracts and unclear IP are the landmines that quietly block a transfer. (Legal landmines that kill deals →)
Final terms — where the gaps get priced
Every gap found in stages 2–4 comes back here as a consequence: a lower price, a larger earnout, a bigger escrow, a seller note, or a walk-away. This is the mechanical truth of diligence — gaps don't get argued away, they get converted into terms. (How buyers build their offer →)
The timeline at a glance
| Stage | Typical timing | What the buyer tests | Most common deal-killer |
|---|---|---|---|
| 1. LOI | Day 0 | Headline terms, exclusivity | Misaligned expectations |
| 2. Financial / QoE | Weeks 2–8 | Normalized earnings, add-backs | Books that re-cut earnings 20–30% |
| 3. Commercial | Weeks 4–10 | Revenue durability, concentration | Owner-held or concentrated revenue |
| 4. Operational / legal | Weeks 6–14 | Transferability, contracts, IP | Non-assignable contracts, unclear IP |
| 5. Final terms | Weeks 10–16+ | Reconciling all findings | Price re-cut, earnout, or walk-away |
Find your gaps before a buyer's clock starts. The Exit Readiness Score scores all eight diligence dimensions in five minutes, so you fix the deal-killers before exclusivity, not during it. Find out what a buyer would see →
Why readiness beats negotiation
The owners who close on strong terms aren't the ones who negotiate hardest at stage 5. They're the ones who walked into stage 1 with so few gaps that diligence had nothing to re-price. Every fix in stages 2–4 takes lead time you don't have once the clock is running — which is why readiness is built years before the LOI, not during the 90 days after it. (Why 70–80% of businesses never sell →)
Frequently asked questions
How long does due diligence take when selling a business?
For businesses under $5M EBITDA, due diligence typically runs 60–120 days from signed LOI to close. Readiness is the biggest variable — clean documentation moves fast, while scrambling to assemble records stalls the deal.
What are the stages of due diligence?
The five stages are: letter of intent, financial diligence and Quality of Earnings review, commercial diligence, operational and legal diligence, and final terms. Each tests a different part of the business.
Where do most business deals fall apart?
Most fall apart in financial diligence (when a Quality of Earnings review re-cuts earnings) and commercial diligence (when owner dependency and customer concentration surface as real numbers).
Is the price in the LOI final?
No. The LOI price is provisional and non-binding. A buyer spends diligence verifying it, and any gaps found get converted into a lower price, an earnout, an escrow, or a seller note at final terms.