Due Diligence Checklist for Buying a Business in Sri Lanka

A Practical Buyer’s Guide to Avoiding Expensive Mistakes

Most business buyers in Sri Lanka don’t fail because they chose a bad business.

They fail because they didn’t verify what mattered before taking over.

Due diligence is the difference between:

• discovering problems before money changes hands, and

• discovering them after you’re already responsible.

This guide explains what due diligence really means in Sri Lanka, what buyers should actually check, and how to spot deal-breakers early — without turning the process into an endless, expensive audit.

This is written for buyers, not lawyers.

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Why Due Diligence Matters More in Sri Lanka

In Sri Lanka, many businesses operate on:

• informal arrangements,

• personal relationships,

• trust rather than documentation.

This does not mean businesses are dishonest.
It means risk is often undocumented.

Common buyer assumptions:

• “The owner seems genuine.”

• “It’s been running for years.”

• “Everyone knows this place.”

None of these replace verification.

Problems in Sri Lankan business sales usually surface after takeover, when:

• supplier credit changes,

• staff behaviour shifts,

• landlords enforce clauses,

• licences don’t transfer,

• numbers don’t match reality.

Due diligence is how you catch these before they become your problem.

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First Principles: What Due Diligence Is (and Isn’t)

Due diligence is:

• verification of key claims,

• identification of survival risks,

• confirmation of transferability.

Due diligence is not:

• mistrust,

• accusation,

• a forensic audit for SMEs.

You are not trying to prove the seller wrong.
You are trying to avoid surprises.

The goal is simple:

“What could hurt me after takeover, and can I live with it?”

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Financial Due Diligence: Reality Over Promises

Minimum financial information to review

• Last 12–24 months revenue summary

• Monthly profit estimates

• Expense breakdown (rent, salaries, utilities, supplies)

• Bank statements (where available and relevant)

Perfect accounts are rare.
Consistency matters more than polish.

What buyers should look for

• stable monthly patterns (not best months)

• explanations for dips or spikes

• alignment between sales, expenses, and lifestyle

Red flags

• numbers changing each conversation

• “trust me” explanations

• refusal to show even basic summaries

• profits that sound too good for the effort involved

If the business cannot explain itself calmly, pause.

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Working Capital and Cash Flow Diligence

Many buyers verify profit but ignore cash flow timing.

You must understand:

• when money comes in,

• when money must go out.

Check:

• rent payment cycle

• salary payment frequency

• supplier credit terms

• customer payment delays

• inventory purchase timing

A profitable business can still collapse if cash timing is wrong.

If you don’t understand cash flow, you don’t understand the business.

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Stock and Inventory Diligence (If Applicable)

Stock is one of the most disputed areas in Sri Lankan deals.

Buyers should confirm:

• physical stock vs records

• slow-moving or dead stock

• damaged or expired items

• realistic valuation method

Clarify in advance:

• whether stock is included in price or separate

• valuation at cost vs selling price

• cut-off date

• who bears shrinkage risk

Never assume “stock is included” without numbers.

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Asset Diligence: What Actually Belongs to the Business

Ask for a clear asset list:

• equipment

• machinery

• vehicles

• furniture

• tools

Verify:

• ownership vs leased items

• age and condition

• maintenance history

• replacement cost

A machine that “works” but fails a month later is still your problem.

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Lease and Premises Diligence (Critical in Sri Lanka)

Many good deals collapse because buyers ignore the lease.

Check:

• copy of the lease agreement

• remaining lease term

• rent escalation clauses

• assignment or transfer clauses

• landlord consent requirements

• deposit handling

Ask early:

• Will the landlord approve the transfer?

• Will rent change?

• Will a new deposit be required?

Never assume continuity.

Lease risk is business risk.

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Licence and Regulatory Diligence

Identify:

• what licences are required to operate

• which licences are critical

Verify:

• validity

• renewal dates

• transferability

• whether licences are tied to:

  • individuals

  • entities

  • locations

Never assume licences “come with the business”.

Some licences add value.
Some cannot move.

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Employee and Labour Diligence

Staff are often the real asset.

Buyers should review:

• number of employees

• roles and responsibilities

• key staff dependencies

• salary structure

Confirm:

• EPF/ETF registration

• contribution status

• any arrears or disputes

High owner dependency = higher buyer risk.

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Supplier and Customer Concentration

Ask:

• who are the top suppliers?

• are alternatives available?

• what credit terms apply?

Check:

• outstanding balances

• supplier dependency on owner relationships

For customers:

• concentration risk

• reliance on one or two large clients

• recurring vs one-off business

One supplier or one customer can sink a business.

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Legal and Structural Diligence

Clarify early:

• asset sale vs share sale

• ownership structure

• partners or shareholders

• existing loans or guarantees

• personal guarantees given by seller

In share purchases especially:

• liabilities come with the company

• compliance history matters

Structure determines risk.

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Digital and Intangible Asset Diligence

Digital assets are often forgotten — until access disappears.

Confirm ownership and transfer of:

• domain name

• website hosting

• business email

• social media pages

• Google Business Profile

• POS systems and software licences

Access should transfer at completion, not “later”.

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Operational Diligence: How the Business Actually Runs

Observe:

• who makes decisions

• who handles problems

• what happens when the owner leaves

Ask:

• what breaks if the owner disappears?

• which tasks are undocumented?

• where does knowledge live?

Owner-dependent businesses are riskier — and cheaper for a reason.

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Risk Diligence: Stress-Testing the Business

Identify:

• top 3 financial risks

• top 3 operational risks

• top 3 people risks

Ask:

• What happens if sales dip 20%?

• What happens if a key staff member leaves?

• What happens if rent increases?

If the answers are unclear, the risk is real.

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Instalments and Payment Structure Diligence

If instalments are involved:

• can cash flow support them?

• what happens during slow months?

• how does control transfer with payment?

Instalments increase complexity.
Diligence must increase, not decrease.

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Red Flags That Should Pause or Kill the Deal

• inconsistent answers

• documents withheld

• pressure to rush

• risks minimised or dismissed

• numbers improving every meeting

• emotional resistance to reasonable questions

Walking away early is not failure.

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When to Bring in Professionals

Use professionals strategically:

• accountant → numbers, cash flow, tax exposure

• lawyer → structure, agreements, risk protection

• advisor → process, negotiation, discipline

Don’t outsource thinking.
Use professionals to support it.

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Buyer Due Diligence Checklist (Quick Reference)

Before committing, confirm you have checked:

✔ Financial performance
✔ Working capital needs
✔ Stock and inventory
✔ Assets and condition
✔ Lease and landlord position
✔ Licences and approvals
✔ Staff and EPF/ETF
✔ Suppliers and customers
✔ Legal structure
✔ Digital assets
✔ Key risks

If several boxes remain unchecked, pause.

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Final Thoughts

Due diligence is not about killing deals.

It is about:

• understanding reality,

• pricing risk correctly,

• avoiding regret.

Good businesses survive scrutiny.
Weak deals fail quietly after takeover.

The best buyers are not the smartest.
They are the most disciplined.

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Short Practical Disclaimer

This article is for general information only and is not legal, tax, or financial advice. Buyers should consult qualified professionals before completing any business purchase in Sri Lanka.