TEXAS BUSINESS LAW
Due Diligence for Buying a Business: A Buyer's Guide
Due diligence is the buyer’s investigation of a business before closing — the structured review of its finances, contracts, and legal exposure that confirms you’re paying for what you think you’re getting. It runs from first contact with the seller through closing, and it is the single best protection a buyer has against inheriting problems they can’t see in a summary or a sales pitch.
The hard rule is timing: finish your diligence before you are legally obligated to buy. How the deal is structured determines when those obligations attach, so understanding the early documents matters as much as reading the financials.
Before Diligence: The NDA and the Letter of Intent
Most business purchases begin with two documents. The non-disclosure agreement (NDA) protects the seller’s confidential information — and sometimes the buyer’s — once real numbers start changing hands. Sign it before you receive anything sensitive.
The letter of intent (LOI) usually follows preliminary talks. It is generally non-binding on the core deal, but specific provisions often do bind the parties: an exclusivity or “no-shop” window, a deposit requirement, and basic contingencies such as financing or inspection. Treat the LOI seriously; it sets the framework — price, structure, and conditions — that the binding purchase agreement will lock in.
The Three Core Reviews
Once the LOI is signed, diligence begins in earnest. For most small and mid-sized deals it organizes into three streams. (For a deeper breakdown, see the types of due diligence involved in a Texas transaction.)
Financial Review
Start with the numbers, because everything else is valued against them. Review the profit-and-loss statement, balance sheet, and revenue records first, then dig into tax returns, payroll, loan documents, and accounts receivable and payable. Small businesses are notorious for thin records, so bring in an accountant or CPA alongside your attorney to decode the financials and gauge the real health of the business.
Contract Review
Once you understand the money, map the obligations behind it. Pull the vendor contracts, leases, service agreements, and customer contracts to see what you’d be assuming. Pay close attention to assignment and change-of-control clauses — a key contract that a counterparty can cancel when the business changes hands can quietly gut the value of the deal if you find it after closing instead of before.
Litigation and Standing Review
Finally, confirm the business is in good legal standing and not carrying hidden exposure. Check its standing with the Texas Secretary of State and its tax standing with the Comptroller, search court and county records for pending or past litigation, and run a UCC lien search for security interests in the business’s assets. Some obligations — unpaid taxes especially — can follow the business into the buyer’s hands.
The Texas Tax Trap: Successor Liability
Tax diligence deserves its own flag because Texas imposes successor liability. If you buy a business and the seller owed state taxes, the Comptroller can pursue you for the unpaid amount, up to the purchase price. The fix is built into the process: buyer and seller jointly request a Certificate of No Tax Due from the Texas Comptroller. If the seller owes anything, the certificate says so, and the buyer withholds that amount from the purchase price until it’s cleared. Skipping this step is one of the most expensive mistakes a Texas buyer can make.
A Buyer’s Diligence Checklist
| Stream | Pull and verify |
|---|---|
| Financial | P&L, balance sheet, tax returns, payroll, loans, A/R and A/P |
| Contracts | Leases, vendor/customer/service agreements; assignment and change-of-control terms |
| Legal standing | Entity good standing, pending/past litigation, UCC liens, IP ownership |
| Tax | Franchise (margin) and sales tax history; Certificate of No Tax Due |
| Operations | Key employees, supplier reliability, inventory, owner dependence |
Frequently Asked Questions
When should due diligence start?
At first contact. The diligence period formally opens after the LOI, but you should be gathering information and protecting yourself with an NDA from the very first substantive conversation — and you must complete it before you’re contractually bound to buy.
What’s the most overlooked item when buying a Texas business?
Tax clearance. Many buyers focus on financials and contracts and skip the Certificate of No Tax Due, which is the only thing standing between them and liability for the seller’s unpaid Texas taxes. Unassignable key contracts are a close second.
Do I need professionals, or can I do diligence myself?
You can review a lot yourself, but the financial, legal, and tax pieces reward expert help. An accountant reads the numbers, and an attorney handles entity standing, liens, contract assignment, and tax clearance — the items most likely to transfer liability if missed.
Can what I find change the price?
Yes, and it often should. Diligence findings flow into the negotiation as price reductions, holdbacks, or stronger seller representations before you sign the binding agreement.
Done well, due diligence is the difference between buying a business and buying a liability. Reidel Law Firm runs buyer-side due diligence as part of flat-fee Texas business purchase work, with direct attorney access from first contact to closing. Get flat-fee help buying a business →
