Due Diligence When Buying a Business in NYC: The Complete Checklist

Buying a business in New York City is one of the largest financial decisions you'll ever make. Due diligence is the investigation process that protects you from inheriting hidden problems, overpaying, or walking into a failing operation. It's your opportunity to verify everything the seller has told you before you're legally bound to close.

Too many buyers in Brooklyn, Queens, and Manhattan rush through this phase, eager to finalize the deal. That eagerness often leads to discovering undisclosed liabilities, inflated revenue figures, or regulatory violations after it's too late. Working with an experienced NYC business acquisition attorney ensures you investigate what matters before signing the purchase agreement.

Thorough due diligence buying business NYC transactions requires examining financials, legal documents, operations, and regulatory compliance.

Financial Due Diligence

Financial due diligence goes beyond reviewing the seller's tax returns. You need to understand whether the business actually generates the profits the seller claims—and whether those profits are sustainable.

Start with a quality of earnings analysis. This examines whether reported earnings reflect actual, recurring cash flow or include one-time events, owner perks, or accounting adjustments that inflate the numbers. Many small business owners run personal expenses through the business, which is legal but distorts true profitability.

Review normalized EBITDA calculations. Sellers often present "adjusted" EBITDA that adds back expenses to make the business look more profitable. Some adjustments are legitimate. Others are aggressive. Your accountant should scrutinize every add-back.

Examine working capital closely. The purchase agreement should specify a working capital target. If the business needs $150,000 in working capital to operate normally, and the seller has been drawing it down before closing, you'll need to fund that gap from your own pocket.

Request at least three years of tax returns and compare them to internal financial statements. Significant discrepancies between what the owner reports to the IRS and what they're showing you as a buyer is a major red flag.

Review accounts receivable aging reports. A business with significant receivables over 90 days may have collection problems or customers who won't pay. Examine inventory valuation methods and conduct a physical inventory count to verify what you're actually purchasing.

Legal Due Diligence

Legal due diligence uncovers liabilities that could become your responsibility after closing.

Conduct UCC lien searches through the New York Department of State. These searches reveal whether the business assets are pledged as collateral for existing loans. If there's a blanket lien on all business assets, you need to ensure that lien gets released at closing—or you'll be buying assets the bank can repossess.

Run judgment searches under CPLR § 5018 to identify any court judgments against the business or its owners. Unsatisfied judgments can attach to business assets or, in some cases, follow the business to new ownership.

Verify there are no outstanding tax liens from the IRS, New York State, or New York City. Tax authorities have powerful collection tools, and certain tax liabilities can transfer to buyers.

Review every significant contract the business has signed. Pay attention to assignment clauses and change-of-control provisions. Many commercial leases, supplier agreements, and customer contracts require consent before the business can be sold. Some contracts terminate automatically upon sale. Discovering this after closing can devastate the business you just bought.

Examine employment agreements, especially for key employees. Non-compete provisions, severance obligations, and benefit commitments become your responsibility. A NYC contract attorney can identify provisions that create unexpected liability.

Operational Due Diligence

Understanding how the business actually operates day-to-day is just as important as reviewing financial statements.

Assess customer concentration risk. If one customer represents more than 20% of revenue, losing that customer could cripple the business. Request customer lists with revenue by customer, and investigate whether key relationships will continue after ownership changes.

Evaluate employee retention probability. Will key employees stay after the sale? Many small businesses depend on one or two critical people. If those employees leave, you may struggle to maintain operations. Consider whether employment agreements with retention incentives are necessary.

Examine supplier relationships and dependencies. Are there exclusive supplier agreements? What happens if a key supplier raises prices or terminates the relationship? Businesses with single-source suppliers face significant operational risk.

Analyze competitive positioning. How does the business compare to competitors? Is the industry growing or contracting? What competitive threats exist? This research should inform whether the asking price is reasonable.

If due diligence reveals operational problems that could lead to disputes, a NYC business dispute attorney can advise on protective measures to include in the purchase agreement.

Regulatory and Compliance Due Diligence

NYC businesses operate under extensive regulatory requirements. Non-compliance can result in fines, shutdowns, or personal liability.

Verify all required licenses and permits are current and transferable. Many NYC business licenses don't automatically transfer to new owners. You may need to apply for new licenses, which can take weeks or months. Some licenses require the seller to surrender theirs before you can obtain yours.

For businesses involving food service, review Department of Health compliance history. Repeated violations or grade downgrades signal operational problems. For businesses selling alcohol, verify SLA license status and transfer requirements—liquor license transfers in New York require state approval and can take several months.

Check Department of Consumer Affairs licensing for applicable businesses. Verify Department of Buildings compliance for the physical premises, including certificate of occupancy, permits for any construction, and violations.

Consider environmental issues. If the business involves manufacturing, dry cleaning, automotive services, or other activities with environmental exposure, Phase I environmental assessments may be necessary. Environmental liability can be substantial and long-lasting.

Different boroughs sometimes have different enforcement patterns and local requirements. A business operating in Brooklyn may face different practical considerations than one in Manhattan or Queens.

Common Due Diligence Red Flags When Buying A Business

Certain findings during due diligence should make you pause—or walk away entirely.

Unexplained revenue spikes shortly before listing the business for sale suggest the seller may have accelerated revenue or engaged in other practices to inflate the sale price. Dig into any sudden improvements in financial performance.

Key customer departures or contract non-renewals in the months before sale indicate the business may be losing its revenue foundation. Sellers sometimes know major customers are leaving and try to sell before the impact hits the financials.

Pending or threatened litigation creates uncertainty about future liabilities. Review all correspondence with attorneys, demand letters, and court filings. Even claims that seem frivolous can be expensive to defend. Understanding the litigation landscape before closing is essential—you may need business litigation counsel to assess the risk.

Regulatory violations, especially recent or repeated ones, signal operational problems that may continue after you take over.

Owner dependency is perhaps the most common issue in small business acquisitions. If the business depends heavily on the current owner's relationships, skills, or presence, that value may not transfer to you. Consider whether a transition period or consulting agreement can mitigate this risk.

Frequently Asked Questions

How long does due diligence take when buying a business?

Due diligence typically takes 30 to 60 days for most NYC small business acquisitions. Complex transactions involving extensive assets, multiple locations, or regulatory issues may require 90 days or longer. The timeline depends on how quickly the seller provides requested documents and how many issues require investigation.

What happens if due diligence reveals problems?

Discovering problems during due diligence gives you options. You can renegotiate the purchase price to reflect the issues, require the seller to resolve problems before closing, add protective representations and warranties to the purchase agreement, or walk away from the deal entirely. The letter of intent should preserve your ability to terminate based on due diligence findings.

Can I back out after due diligence?

If your letter of intent or purchase agreement includes proper due diligence contingencies, you can generally terminate the deal and recover your deposit if due diligence reveals material problems. Without these protections, walking away may mean forfeiting your deposit or facing breach of contract claims. This is why having an experienced acquisition attorney draft or review your letter of intent is essential.

Who pays for due diligence costs?

Buyers typically pay their own due diligence costs, including fees for accountants, attorneys, and any third-party inspections or assessments. These costs vary widely depending on the complexity of the business and the depth of investigation required. Budget for these expenses when evaluating whether a deal makes financial sense.

Should I hire an attorney for due diligence?

Yes. While accountants handle financial due diligence, attorneys handle legal due diligence—reviewing contracts, conducting lien searches, analyzing regulatory compliance, and identifying legal risks. An attorney also ensures your purchase agreement includes appropriate representations, warranties, and indemnification provisions based on what due diligence reveals. For NYC business acquisitions, legal due diligence is not optional.