The Broader Due Diligence Framework

Financial due diligence is necessary, but it's not enough. A thorough SME acquisition due diligence covers at least nine distinct areas, and many of them matter just as much commercially as the financial analysis.

If your resources are limited, prioritize based on your strategic objective. Buying a customer base?
Commercial due diligence comes first. Buying technology? Technical due diligence becomes critical.

Commercial Due Diligence

Commercial due diligence tests whether your strategic rationale actually holds up, and it assesses how good and how stable the target's revenue really is. Look at:

Customer concentration analysis. If more than 30% of revenue comes from a single customer, that's a significant risk, especially if they have change-of-control clauses that let them leave.
Customer relationship mapping. Which relationships belong to the founder personally versus which ones are locked into contracts?
Market position and competitive dynamics. Is this business really a market leader in its niche, or is the position more fragile than it appears?
Pricing sustainability. Can the business maintain current margins and pricing under new ownership?
Pipeline and order book quality. How much of the forecast revenue is actually contracted versus just estimated?

Legal Due Diligence

For SMEs, focus legal due diligence on these priority areas:

Change-of-control clauses. In customer, supplier, and financing contracts—these can trigger termination or renegotiation rights the moment you close the deal.
Intellectual property ownership. In founder-led businesses, IP (trademarks, domain names, software, proprietary processes) is often registered in the founder's personal name rather than the company's.
Employment contracts and restrictive covenants. Especially for key employees and the founder. A founder without a non-compete is a competitive problem after the deal closes.
Property leases. Confirm the business can actually stay in its location after you own it. Lease assignments or landlord consent requirements can slow down or complicate deals.
Regulatory licenses and permits. In regulated industries, make sure the licenses are held by the company you're buying, not by the individual owner.
Litigation and disputes. Any lawsuits, labor disputes, regulatory investigations, or supplier conflicts that are either pending or threatened.

Human Capital and People Due Diligence

People are often the real value driver in an SME acquisition, and they're the first to leave if the transition goes badly. Assess:

Key employee identification and retention risk. Who's essential to keeping operations running and keeping customers happy?
Compensation benchmarking. Are your key targets fairly paid compared to the market? Could there be a compensation shock that causes departures?
Culture and management style. How was this business run under the founder? Will the team accept a shift to more structured, process-driven management?
Workforce composition. Employment classification (full-time versus contractor), compliance with employment law, and any informal or undocumented arrangements.

Technology and Operational Due Diligence

For businesses where technology matters, assess:

Systems and software. Are core business systems (ERP, CRM, accounting software) owned or licensed? Will those licenses transfer when ownership changes?
Technical debt. What investment will you need to make to modernize or replace legacy systems after you own the business?
Data integrity and cybersecurity posture. What data does the business hold, and how is it protected? This matters especially if the business holds customer personal data under applicable data protection regulations.
Operational processes. Are key processes actually documented? Documentation (or the lack of it) directly affects your integration risk and key-person dependency.

Tax Due Diligence

Map out the full tax history:

Historic tax compliance. Are all tax returns filed and current for income tax, GST/VAT, payroll tax, and any industry-specific taxes?
Transfer pricing. Any arrangements with related entities should be reviewed for arm's-length compliance.
Tax losses and deferred tax assets. Understand what, if any, deferred tax benefits carry over to you depending on whether you do a share or asset purchase.
Stamp duty and transaction taxes. The structure you choose (shares versus assets) affects the tax treatment for both you and the seller. Get specific tax advice before you finalize the deal structure.

ESG and Regulatory Compliance

Even at the SME level, Environmental, Social, and Governance considerations are increasingly important. Assess:

Environmental liabilities. Particularly for businesses in manufacturing, logistics, or land-intensive industries.
Labor practices compliance. Minimum wage, leave entitlements, health and safety. Regulatory compliance. Sector-specific licenses, permits, and certifications the business depends on.

M&A - Due Diligence Beyond Accounting

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