TEXAS BUSINESS LAW
Due Diligence When Buying or Selling a Texas Business
Due diligence is the buyer’s investigation of a business before closing — a structured review of its finances, contracts, legal exposure, operations, and taxes to confirm what’s being sold is what was promised. It is the single best protection a buyer has against paying for problems they can’t see, and the single best way a seller keeps a deal from falling apart at the last minute. Skipping it doesn’t save time; it just moves the surprises to after the money has changed hands.
This guide covers what to review on each front and how a seller prepares so the process runs fast and clean.
Why Due Diligence Decides the Deal
Due diligence is where price meets reality. A business can look great in a summary and very different in its records — a single large customer propping up revenue, a lease that can’t be assigned, unpaid sales tax, litigation in the wings. For the buyer, the goal is to verify value and find risk before signing the binding purchase agreement. For the seller, the goal is the opposite and the same: surface and disclose issues early, because buyers forgive disclosed problems and punish discovered ones — often by walking away or cutting the price.
It belongs before the purchase agreement is final, with findings flowing into the negotiation as price adjustments, holdbacks, or seller representations.
Financial Due Diligence
Start with the numbers, because everything else is valued against them. Review at least three to five years of:
- Income statements — revenue trends, margins, and one-time items dressed up as recurring
- Balance sheets — assets, liabilities, and working capital
- Cash flow statements — whether the business actually generates cash, not just paper profit
- Tax returns — which should reconcile to the financial statements; gaps are a flag
Look hard at customer concentration (how much revenue rides on the top few accounts), the quality of earnings (recurring vs. one-off), and any add-backs the seller uses to inflate adjusted profit. An independent valuation built on these records keeps the price grounded.
Legal Due Diligence
Legal review confirms the business is what it claims to be and isn’t carrying hidden exposure. The core items:
| Area | What to verify |
|---|---|
| Entity standing | Formation documents, good standing with the Texas Secretary of State, ownership records |
| Material contracts | Customer, vendor, and lease agreements — especially termination and change-of-control clauses |
| Licenses and permits | Current, valid, and whether they transfer to a new owner |
| Litigation | Pending or threatened suits, judgments, liens |
| Intellectual property | Ownership and registration of trademarks, copyrights, and key IP |
| Employment | Contracts, classification of workers, benefit obligations |
Two clauses deserve special attention. Change-of-control and assignment provisions in key contracts can let a counterparty cancel when the business is sold — find these before closing, not after. And confirm whether each license or permit transfers or must be reissued in the buyer’s name, since regulated businesses can’t legally operate on a permit that didn’t follow the sale.
Tax Due Diligence and Successor Liability
Tax is where a buyer can inherit someone else’s problem. Review the seller’s franchise (margin) tax filings and sales-tax history, and — this is the critical step — obtain a Certificate of No Tax Due from the Texas Comptroller. Buyer and seller file Form 86-114 jointly; if the seller owes anything, the Comptroller says so, and the buyer withholds that amount from the purchase price. Skip it, and the buyer can be held liable for the seller’s unpaid state taxes up to the purchase price. For how the ongoing tax works, see calculating Texas franchise taxes.
Operational and Other Diligence
Beyond the books and the law, confirm the business can keep running after you take over:
- Operations — key processes, supplier reliability, inventory condition, and whether anything depends entirely on the departing owner.
- People — which employees are essential, what they’re owed, and whether they’ll stay.
- Customers and suppliers — contract terms, concentration, and relationships that may not survive a change in ownership.
- Insurance and risk — coverage, claims history, and gaps, including data-security practices.
- Environmental — for businesses with real property or industrial operations, a Phase I Environmental Site Assessment (under the current ASTM E1527-21 standard) screens for contamination liability. A Phase I is generally valid for up to a year when its core components are kept current, and is the basis for CERCLA “innocent landowner” protection.
How Sellers Prepare
Sellers control how smoothly diligence goes. Before listing, gather and organize the same records a buyer will demand — financials, tax returns, contracts, corporate documents, IP, and an asset list — and run a self-audit to catch discrepancies first. Get an independent valuation so the price is defensible. Then be transparent: disclose known issues up front. Dishonesty discovered mid-diligence is the fastest way to kill a deal and invite litigation. Throughout, keep the business performing — a dip in results during the sale gives buyers a reason to renegotiate.
Frequently Asked Questions
How long does due diligence take when buying a business?
For a small to mid-sized Texas business, due diligence commonly runs three to six weeks, depending on how organized the seller’s records are and how complex the business is. Sellers who prepare documents in advance can cut that time substantially.
What’s the most overlooked item in business due diligence?
Tax clearance. Many buyers focus on financials and contracts but skip the Certificate of No Tax Due, which is the only thing standing between them and liability for the seller’s unpaid Texas taxes. Change-of-control clauses in key contracts are a close second.
Who pays for due diligence?
Each side generally bears its own costs — the buyer pays for its investigation (attorneys, accountants, valuations, environmental assessments), and the seller pays to prepare and produce records. These costs are part of the deal budget for both parties.
Can due diligence change the purchase price?
Yes, and it often does. If diligence reveals problems — customer concentration, deferred liabilities, unpaid taxes, an unassignable lease — the buyer can negotiate a lower price, a holdback, or stronger seller representations before signing the binding agreement.
Due diligence done well is the difference between buying a business and buying a liability. Reidel Law Firm runs buyer and seller due diligence as part of flat-fee Texas business sale and purchase work, with direct attorney access. Get flat-fee help with your Texas business sale →
