While "due diligence" can be used to describe several different investigations that anyone party to a contract might carry out before signing that contract, in the case of a buyer considering taking over a business, the due diligence process is usually focused on making sure that the business is exactly what the seller promises. That can mean looking at inventory, accounting records, and much more.

 
The Questions That Come Up During Due Diligence

 
Kumi Bradshaw's job with Asgill Post is to value companies, as well as provide advice during the business acquisition and sales process. He has been through the due diligence process many times with different clients, to the point where it has become a routine process for him. As a business owner, there are some specific topics you should expect to discuss as you go through the due diligence process, Bradshaw says. He points out a variety of questions you will almost always be asked, pointing out that buyers consider cash flow one of the most important factors during due diligence:

 
How much cash does the business generate? How does it generate cash? Is there documented proof of the seller's statements? Invoices, bank statements etc... Due diligence will go beyond the review of a Quickbooks file or standard financial statements.
 
Does the business allow customers to pay on account? How are receivables collected and what are the terms? Are there significant outstanding receivables?
 
What are the expenses like? What is the mix between fixed and variable expenses? As a rule of thumb, a business with a higher concentration of variable expenses versus fixed expenses will require a lower level of sales to break even.
 
What is the burn rate? How much cash does the business need for operating expenses to be paid on a monthly basis? How much working capital is currently available to pay for this? This will influence the amount of financing required by the buyer.

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Source: www.openforum.com