TEXAS BUSINESS LAW
Due Diligence for a Texas Business Sale: A Guide
Due diligence is the investigation a buyer runs before closing to confirm a Texas business is worth its price and carries no hidden liabilities. It breaks into several focused reviews — financial, legal, operational, strategic, and environmental, plus the relationships that hold the business together — and each one targets a different category of risk. Skip a category and you inherit whatever was hiding there.
This guide covers the types of due diligence that matter in a Texas deal, what each one examines, and the state-specific checks that out-of-state buyers tend to miss.
Watch — What Do Attorneys Do in a Business Sale:
The Types of Due Diligence, at a Glance
| Type | What you examine | Common red flags |
|---|---|---|
| Financial | 3–5 years of P&Ls, balance sheets, tax returns, cash flow | Revenue that can’t be traced; undisclosed debt |
| Legal | Entity standing, contracts, licenses, litigation, liens | Lapsed permits; pending lawsuits; change-of-control clauses |
| Operational | Processes, key employees, inventory, suppliers, equipment | Owner-dependent revenue; one customer carrying the business |
| Strategic | Market position, competitors, growth prospects, IP | Eroding market share; unprotected trademarks |
| Environmental | Permits, compliance history (for property/industrial deals) | Contamination liability that travels with the land |
| Insurance & risk | Coverage, claims history, cybersecurity, data practices | Underinsurance; a history of unresolved claims |
Financial Due Diligence
Financial due diligence confirms the earnings the seller is selling you actually exist. Review three to five years of profit-and-loss statements, balance sheets, and federal tax returns, and reconcile reported revenue against bank deposits. Look at the quality of earnings, not just the totals — recurring revenue from a broad customer base is worth more than a one-time spike or income that depends on the departing owner.
Two things to nail down: outstanding debt and whether it is secured by the assets you are buying, and the split between fixed and variable expenses, which tells you how the cost structure behaves once you own it. An independent valuation gives both sides a defensible price and keeps a buyer from overpaying.
Legal Due Diligence
Legal due diligence verifies that the business is what the seller says it is and that nothing legal travels with it unexpectedly. Core checks:
- Good standing. Confirm the entity is active and in good standing with the Texas Secretary of State and that franchise tax filings are current with the Comptroller.
- Authority to sell. Verify the seller actually has the corporate or member authority to transfer the business.
- Contracts. Read material contracts and the lease for change-of-control clauses that let a landlord, customer, or vendor terminate when ownership changes.
- Licenses and permits. Confirm they are current and transferable; a lapsed occupational or industry license can halt operations.
- Litigation and liens. Search for pending lawsuits, judgments, UCC liens, and tax liens that could become your problem.
Operational and Strategic Due Diligence
Operational due diligence examines how the business actually runs: internal controls, inventory and supply-chain management, equipment condition, and the contracts and compensation tied to key employees. The risk to hunt for is dependence — revenue that walks out the door with the owner, or a single customer or supplier the business can’t survive losing.
Strategic due diligence looks outward at market position, the competitive landscape, growth prospects, and the strength of intellectual property. Confirm that trademarks, patents, and copyrights are registered, owned by the entity being sold, and free of disputes — IP gaps quietly cap a business’s value.
Texas-Specific Diligence
Two checks are particular to Texas and easy to overlook:
Franchise tax standing. Texas LLCs, corporations, and limited partnerships owe an annual franchise (margin) tax filing. Even businesses below the no-tax-due revenue threshold — $2.65 million in annualized total revenue for 2026 reports — must still file a Public Information Report. (The separate “No Tax Due Report” form was retired effective January 1, 2024.) Confirm filings are current; a delinquent entity can lose its right to do business in the state.
Tax clearance before closing. Under Texas Tax Code Section 111.020, a buyer can inherit the seller’s unpaid state taxes up to the purchase price. Request a Certificate of No Tax Due from the Comptroller (Form 86-114) before closing. Build in time — it issues within about 10 business days normally, but up to 90 days if the Comptroller audits the seller.
Environmental and Insurance Review
For deals involving real property or any industrial or manufacturing operation, environmental due diligence reviews permits and compliance history because contamination liability can attach to the land regardless of who caused it. When in doubt, a Phase I environmental assessment is cheap insurance against an expensive surprise.
Finally, review the business’s insurance coverage and claims history, and — increasingly important — its cybersecurity and data-handling practices. A pattern of claims or a thin policy signals risk you’ll be underwriting after closing.
Putting It Together
Due diligence is where the price gets confirmed or renegotiated. Findings flow straight back into the purchase agreement: a discovered liability becomes an indemnification term, a lapsed permit becomes a closing condition, an owner-dependent customer becomes a transition covenant. For how those findings shape the contract, see our guide to the key clauses in a Texas purchase agreement, and for the deal as a whole, the step-by-step guide to buying a business in Texas.
Frequently Asked Questions
How long does due diligence take?
For a small to mid-sized Texas business, two to six weeks is typical, depending on how organized the seller’s records are and whether the Comptroller needs to audit before issuing tax clearance.
Who pays for due diligence?
The buyer generally bears the cost of investigating the business, including attorney and accountant fees. Sellers invest in “sell-side” preparation — organizing records and resolving issues early — to keep the deal on track and the price firm.
What is the most overlooked check in a Texas deal?
Tax clearance. Buyers focus on the financials and forget that under Section 111.020 they can be on the hook for the seller’s unpaid state taxes. Requesting the Certificate of No Tax Due before closing closes that gap.
Can due diligence change the price?
Yes. Diligence routinely uncovers issues — deferred maintenance, customer concentration, a pending claim — that justify a price adjustment, an escrow holdback, or a specific indemnity in the purchase agreement.
Buying or selling a Texas business? Reidel Law Firm runs buyer and seller due diligence and drafts the agreement on a flat fee, with direct attorney access throughout — see how the business sale package works.
