Legal Due Diligence Documents for Small Business Sales

We’ve all been there. You have a motivated seller, a buyer with plenty of "dry powder," and an LOI that was signed with champagne toasts. The financials are clean, and the SDE (Seller's Discretionary Earnings) looks fantastic. You’re already mentally spending that commission check.

Then, the lawyers get involved.

Suddenly, a "perfect" deal grinds to a halt because of a single sentence in a vendor contract or a missing signature on an IP assignment from three years ago. It’s the stuff of broker nightmares.

Legal due diligence identifies contractual obligations, potential liabilities, and legal risks that could affect the transaction or future business operations. Considering that estimates suggest up to 67% of business sales fail during the due diligence phase, getting these documents right isn't just "admin work"—it's deal protection.

Core Due Diligence Docs for SMB Acquisition

Before we get into the weeds of contracts, we have to verify the vehicle itself. If the entity isn't solid, you’re selling a car with no VIN.

Formation and Governance

A common friction point arises when a "mom and pop" seller has been operating loosely for decades. You need to ensure the entity is actually in Good Standing. If they missed a state filing two years ago, you can't close until it's fixed.

Document	Purpose
Articles of Incorporation/Organization	Entity establishment
Bylaws or Operating Agreement	Governance rules
Amendments	Changes to structure
Good standing certificates	Current status
Stock certificates/membership interests	Ownership verification
Board/member resolutions	Decision authority

Ownership Verification

This is where you find the "silent partner" or the ex-spouse who technically still owns 5%.

Ownership percentages
Rights and obligations of owners
Transfer restrictions
Approval requirements for sale

Contract Review

This is usually where the "deal killers" hide. The most dangerous phrase in M&A isn't "revenue decline"—it's "Anti-Assignment."

Customer Contracts

If a business relies on three major clients, and those contracts have strict "Change of Control" clauses that allow the client to walk away upon sale, your buyer is buying an empty shell. According to the IACCM, poor contract management can cost a company up to 9% of its annual revenue, but in a sale, it can cost you the whole deal.

Review Area	Focus
Term and renewal	Revenue continuity
Termination provisions	Risk of loss
Assignment clauses	Transferability
Pricing commitments	Margin protection
Service obligations	Operational requirements
Non-compete provisions	Customer restrictions

Vendor Contracts

Don't let a "tire kicker" buyer get spooked because a critical supply agreement expires next month.

Review Area	Focus
Supply agreements	Critical suppliers
Pricing and terms	Cost structure
Exclusivity provisions	Limitations
Assignment clauses	Transferability
Termination terms	Supply continuity

Lease Agreement

We all know landlords can be the unofficial "third party" in any deal. If there are no renewal options left or the assignment fee is exorbitant, you need to know now.

Review Area	Focus
Remaining term	Facility security
Renewal options	Future flexibility
Rent and escalations	Cost projections
Assignment/sublease	Transfer rights
Personal guarantee	Buyer obligations
Use restrictions	Operations limitations

Employment Matters

Labor issues are exploding in the SMB space. A report by Counterpart found that 37% of small businesses have faced an employee lawsuit in the last year. Buyers are terrified of inheriting a wage-and-hour claim.

Employment Documents

Reviewing these documents protects the buyer from "add-backs" that aren't actually legitimate, like underpaid commissions.

Document	Purpose
Employment agreements	Key employee terms
Non-compete agreements	Competitive protection
Confidentiality agreements	IP protection
Commission/bonus plans	Compensation obligations
Employee handbook	Policy compliance

HR Compliance

Intellectual Property for SMB Acquisitions

For tech-enabled businesses, this is the whole asset. If a freelance developer wrote the code five years ago and never signed an IP assignment agreement, the seller doesn't own their product.

IP Documentation

IP Type	Documents Needed
Trademarks	Registrations, applications
Patents	Grants, pending applications
Copyrights	Registrations
Trade secrets	Protection policies
Domain names	Registration records
Software	Licenses, ownership

IP Considerations

Licenses and Permits

You can't sell a restaurant if the liquor license doesn't transfer. This is a binary risk—either you have the license, or you don't operate.

Business Licenses

Category	Examples
General business	Business license, DBA
Industry-specific	Contractor, professional, health
Regulatory	EPA, OSHA, FDA
Local permits	Zoning, signage, health

Transferability Assessment

Which licenses transfer automatically?
Which require re-application?
Timeline for new licenses?
Any licensing issues or violations?

Litigation and Claims

Skeletons in the closet are expensive. The U.S. Chamber of Commerce notes that legal liabilities are seven times greater for small businesses (relative to revenue) than larger ones.

Current Matters

Historical Matters

Insurance Review

Buyers need to know if the business is insurable post-close. This is also where you discuss "Tail Coverage" for D&O (Directors and Officers) liabilities.

Current Coverage

Type	Review Points
General liability	Coverage limits, claims history
Property	Asset coverage, deductibles
Workers' comp	Claims experience, rating
Professional liability	E&O coverage
Auto	Fleet coverage
D&O	Director/officer protection

Claims History

Past claims and outcomes
Current open claims
Insurance availability post-close

Red Flags for Small Business Acquisitions

If you spot these early, you can sometimes fix them. If you find them a week before closing, the deal is dead.

Legal Red Flags

Red Flag	Concern
Pending litigation	Financial liability
Non-transferable key contracts	Revenue risk
Lease expiring soon	Facility uncertainty
License violations	Operating risk
IP ownership unclear	Asset questions
Employment disputes	HR liabilities

Before moving into brokerage, Elena spent a decade as a forensic accountant for a top regional firm. She brings a sharp eye to the financial side of deal-making, helping business owners recast their financials to uncover hidden value and maximize EBITDA prior to listing. Her articles focus on pre-sale financial planning, understanding business valuations, and the tax implications of selling your company.

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