When it comes to selling a business, few words trigger both anxiety and opportunity quite like Due Diligence.
It’s the stage where optimism meets reality—where numbers are tested, stories are verified, and risks are either confirmed or alleviated. But more than just a box-checking exercise, Due Diligence is one of the most critical factors in how—and whether—a deal actually closes.
In this week’s Term of the Week, we’re digging into Due Diligence: what it means, why it matters, and how a proactive approach can increase your sale price, preserve your timeline, and even protect your legacy.
What is Due Diligence?
In simple terms, Due Diligence is the buyer’s process of confirming that everything you’ve represented about your business—financially, operationally, legally, and otherwise—is accurate.
It begins after an offer is accepted (typically in the form of an LOI—Letter of Intent) and before the final closing. This is when the buyer brings in advisors—lawyers, CPAs,
lenders, and sometimes entire consulting firms—to verify every claim, uncover risks, and ensure there are no unpleasant surprises.
Due Diligence is the M&A version of “trust, but verify.”
What Areas Are Covered in Due Diligence?
The scope will vary depending on the size of the deal, the structure of the business, and the buyer’s concerns. But common categories include:
Financial Records: Profit and loss statements, tax returns, balance sheets, accounts receivable/payable aging, and EBITDA normalization.
Legal & Regulatory Compliance: Contracts, permits, leases, lawsuits, intellectual property rights, and employment agreements.
Customer & Vendor Relationships: Concentration risks, contract terms, churn rates, and vendor reliability.
Human Capital: Key employees, compensation structures, benefits, and non-competes.
Operational Systems: SOPs, technology stack, CRM systems, fulfillment processes, and vendor management.
Buyers want to understand not just how things work—but what breaks if you walk away.
Real-World Example: The Case of the Hidden Clause
We once worked with a client in the specialty manufacturing space who received a lucrative LOI from a strategic buyer. On paper, it was the perfect fit. The LOI valued the business at 6.1x EBITDA and included favorable terms like a short earnout and minimal escrow.
But during Due Diligence, a small—but meaningful—contract clause surfaced. A long-term vendor agreement included a “change of control” clause that allowed the vendor to renegotiate or exit if the company was sold.
The vendor represented nearly 70% of the business’s supply chain.
The deal didn’t fall apart, but the buyer used this leverage to renegotiate terms. The final multiple came down. A portion of the payment shifted into an earnout. And additional holdbacks were added in case the vendor walked.
Due Diligence didn’t kill the deal—but it changed the game.
If the seller had addressed this earlier (e.g., renegotiated the vendor clause or disclosed it proactively), they might have held firmer on price.
How to Prepare for Due Diligence Before You Sell
1. Get Your House in Order (Years, Not Months, in Advance) Audited or reviewed financials, clean bookkeeping, documented processes, updated contracts—all of these give buyers confidence. Think of it like staging your house before an open house. Messy records suggest deeper problems, even if none exist.
2. Know What’s Likely to Come Up A seasoned M&A advisor can walk you through the red flags likely to trigger scrutiny. Whether it’s customer concentration, expiring leases, undocumented revenue, or pending litigation—what you know and disclose upfront holds more power than what they uncover later.
3. Don’t “Over-Sell” the Business Be honest and balanced in how you position your company. Overpromising only sets the stage for disappointment during Due Diligence. When the buyer discovers inconsistencies, even minor ones, it can erode trust fast.
4. Build Your Due Diligence Folder Now Start assembling a digital data room. Organize it into categories: financials, tax documents, HR files, contracts, IP, operations. Having this ready early is a huge credibility builder and often shortens the timeline from LOI to close.
Due Diligence: A Deal Maker or Deal Breaker?
Here’s the truth: every deal has skeletons. The difference lies in whether they’re acknowledged and addressed—or left for the buyer to stumble upon.
Sellers who lean into the Due Diligence process with transparency, preparation, and expert guidance are more likely to close with favorable terms. Those who treat it as a “necessary evil” often find themselves back at the negotiating table—or worse, back on the market.
Up Next: Earnouts - What They Really Mean at the Closing Table
Due Diligence may determine if you close, but Earnouts often determine how much you get paid.
Next week, we’ll explore one of the most misunderstood deal terms in M&A: Earnouts—how they’re structured, when they make sense, and why they sometimes lead to tension after the sale.
Stay tuned as our M&A Deal Structures & Terms series continues—only in the Trending Up Term of the Week.
