The due diligence issue when buying a business is a long topic with many items. I will break them down into a series of steps that when completed will make a reasonable starting point for due diligence when buying a business. Since all businesses are different this list may not be appropriate for every situation but it is (or should I say will be) a good check list.
A critical element is examining the sellers business tax returns.......BUT after you examine the tax returns and before completing the business purchase make sure you ask the seller to sign an IRS form 4506. This form will allow you to pull a transcript of the tax returns from the IRS that will confirm that the tax returns filed by the seller are actually the same as the tax returns you received! If they are different you need to get a good explanation as to why (and I'd like to hear the reason as well!)
As always, trust but verify!