Financial Due Diligence Checklist for Buying or Investing in an Indian Business

A financial due diligence checklist keeps a buyer or investor from relying on the headline numbers alone. Before you buy a small or mid-sized business in India, or take a meaningful stake in one, you want to know three things: what the business really earns, what it really owes, and what could surface after the money has moved. The checklist below is written for deals between private businesses, where the books are often less formal than in large companies and the risks sit in different places.

Before you start: set the scope

Diligence should be sized to the deal. Agree in writing what you will review, which periods (usually the last two or three financial years and the current year to date), who on the seller's side answers questions, and how documents will be shared. Ask for a data room, even a shared folder, so you can track what has been provided. Decide early which issues would make you walk away, so the work is pointed at them first.

1. Quality of earnings

• Reconcile reported profit to the bank. Profits that never turn into cash need an explanation.
• Strip out one-off income and costs: an insurance claim, a large one-time order, a legal settlement, a closed branch.
• Adjust for owner-related items: family salaries, personal expenses run through the business, rent paid to the owner above or below market.
• Check revenue recognition: are sales booked when goods are delivered or services performed, or earlier?
• Look at revenue concentration: how much comes from the top five customers, and are those relationships contracted or informal?
• Compare monthly trends, not just annual totals, to spot a recent decline or a year-end push.

2. Working capital and cash

• Age the receivables. Old balances from customers who have stopped buying are rarely collected.
• Count or sample inventory and look for slow-moving, damaged or obsolete stock still carried at cost.
• Review payables for stretched suppliers and overdue statutory dues.
• Work out a normal level of working capital across the year, so the price can assume it is left in the business at completion.
• List all borrowings, overdrafts, vehicle and equipment loans, and personal guarantees given by the owners.

3. Tax and statutory compliance status

Compliance gaps are the most common surprise in Indian SME deals, and some follow the business to the new owner. For GST, section 85 of the CGST Act makes the person who transfers a business and the person who receives it jointly and severally liable for tax, interest and penalty due up to the date of transfer, including amounts determined later. Check:

• GST: returns filed for every period, a reconciliation of GSTR-1, GSTR-3B and the books, input tax credit claimed against GSTR-2B, and any open notices or demands on the portal.
• TDS: deductions made and deposited on salaries, rent, contractor and professional payments, quarterly returns filed, and any defaults shown on the TRACES statement. Expenses on which tax was not deducted can be partly disallowed in the income tax computation.
• Income tax: returns filed, assessments completed, pending proceedings, and refunds or demands outstanding.
• ROC filings for a company or LLP: annual financial statements and annual returns filed with the Registrar, statutory registers maintained, and charges on assets recorded correctly on the MCA portal.
• Payroll and labour: provident fund, ESI and professional tax paid and filed, and registrations under the labour laws that apply to the business.
• Licences and registrations needed for the business to operate, and whether they can be transferred.

See the GST compliance checklist for what a clean GST position looks like →

4. Contingent liabilities and disputes

• Pending or threatened litigation, consumer complaints and arbitration.
• Tax notices at any stage, even where the seller expects to win.
• Guarantees and letters of comfort given for other parties.
• Warranty claims, refunds and product returns that may arise after completion.
• Employee claims: unpaid gratuity, bonus or leave encashment, and disputes with former staff.

5. Related parties

In owner-run businesses, related-party arrangements are normal, but they change what the business is worth without the owner. List every transaction with the owners, their families and their other businesses: sales, purchases, rent, loans, shared staff and shared premises. Ask which of these will continue after the deal and on what terms. A supplier that is the owner's other company may charge more, or stop supplying, once the owner has sold.

6. Key contracts

• Customer and supplier contracts, especially terms on price, exclusivity and termination.
• Change-of-control clauses that let a counterparty end a contract when ownership changes.
• Leases for premises, including lock-in periods and whether the landlord must consent to a transfer.
• Franchise, distribution or licence agreements the business depends on.
• Loan agreements with covenants or prepayment terms triggered by a sale.

Red flags to look for

• Cash sales or expenses that do not appear in the books, or a seller who offers "real" numbers separate from the filed accounts.
• Large differences between GST returns and the books with no reconciliation.
• Year-end journal entries that move profit between periods.
• Frequent changes of accountant or auditor, or an auditor's report with qualifications.
• Delays in providing basic documents such as bank statements.
• A single customer, supplier or employee the business could not run without.

How findings feed deal structuring

Diligence is useful only if its findings change the deal. Rank each issue by its effect: some change the price, some change the terms, and a few change whether you proceed at all. Typical responses include reducing the price for adjusted earnings or a working capital shortfall, holding back part of the payment until a tax matter closes, paying part of the price as an earn-out linked to future results, asking the seller to fix a filing gap before completion, and writing specific warranties and indemnities into the agreement. Where history carries too much risk, buying the assets rather than the shares can let you choose what you take on, though tax and transfer costs differ and need advice for the specific deal.

For example, imagine a buyer looking at a Bengaluru food distribution business. Diligence finds that a third of reported profit came from one contract that ended last quarter, that receivables include balances from two customers who have stopped ordering, and that TDS on contractor payments was not deducted for one year. The buyer reprices on the lower earnings, sets the working capital target excluding the doubtful balances, and holds back part of the price until the TDS position is regularised. (This is an illustration, not a client case.)

Agreeing a price? Read how to value a startup or business in India →

Frequently asked questions

How long does financial due diligence take for a small business?

It depends mostly on how quickly the seller provides documents and how clean the books are. A focused review of a small business can move quickly once information is in hand; gaps in records are what stretch the timeline.

Is financial due diligence the same as an audit?

No. An audit gives an opinion on whether past financial statements are fairly presented. Due diligence is done for a specific deal and looks forward: whether the earnings will continue, what liabilities come with the business and how that should affect price and terms.

Do I need due diligence if I know the seller well?

Usually yes. Trust in the seller does not reveal a tax demand they do not know about, a supplier's filing gap that affects input tax credit, or a contract that ends on a change of ownership. A lighter review, agreed openly, protects the relationship as well as the buyer.

Should sellers run diligence on themselves?

It often helps. Testing your own numbers before a buyer does gives you time to fix filing gaps, prepare explanations and avoid a price cut late in the deal.

Restructuring before a deal? See business structuring and joint ventures →

Beyond Basics carries out financial due diligence for buyers, investors and sellers in Bengaluru, scoped to the size of the deal. We review the books, filings and contracts, rank what we find by its effect on price and terms, and work with our partner Chartered Accountants and advocates so the findings carry through into the structure and the agreement.

Financial due diligence and deal structuring in Bangalore →