Getting Your Company Ready for an Acquirer’s Diligence

When an acquirer gets serious, the tone changes. Friendly strategy conversations give way to a long list of requests, and a team of people you have never met starts examining every part of your business. This is diligence, and more deals are repriced, delayed or lost here than founders expect.

I have run this process from the buyer’s side many times. Very few deals fall apart because of one terrible discovery. They fall apart because small surprises add up until the buyer loses confidence. The good news is that most of those surprises are fixable in advance.

1. What the Buyer Is Really Testing

Behind the hundreds of requests, an acquirer is asking four things:

• Is the business what you told us it is?
• Will it keep working after we own it?
• What could go wrong that we would be responsible for?
• Can we integrate it, and will the key people stay?

Every document they ask for traces back to one of these.

2. Financials They Can Trust

Nothing slows a deal like numbers that do not tie out.

• Clean, consistent financial statements, ideally reviewed by an outside accountant
• Revenue you can explain: by customer, by product, recurring versus one-time
• Customer concentration stated plainly. If one customer is a large share of revenue, say so early.
• Taxes filed and paid, including sales tax and payroll tax. Unpaid tax exposure is one of the most common reasons buyers hold back part of the price.

3. Contracts and Commitments

Buyers read your contracts for anything that limits what they can do with the company.

• Change-of-control and assignment clauses that let a customer or partner walk away when you are sold
• Exclusivity, most-favored-customer pricing or non-compete terms you granted along the way
• Unusual commitments, such as custom features, uncapped liability or long-term price locks

Know where these are before the buyer finds them.

4. Who Owns the Product

For technology companies, this is where I have seen the most avoidable problems.

• Every employee and contractor who touched the product should have signed an agreement assigning the work to the company.
• Open-source software should be inventoried, with the licenses understood.
• Founder-era work done before incorporation, or while employed elsewhere, should be clearly documented.

Gaps here can usually be repaired, but far more easily before a deal than in the middle of one.

5. People

• A clean capitalization table. Every share, option and promise of equity accounted for and documented.
• Key employees identified, with a view on what will keep them through a transition
• Worker classification handled correctly. Contractors who look like employees are a liability buyers price in.

Buyers are often acquiring the team as much as the product. Expect them to care a great deal about who stays.

6. Start Before Anyone Asks

The best time to prepare is when no one is looking at you.

• Build the data room now. Organize corporate records, contracts, financials and IP documents in one place and keep it current.
• Fix what you find. Missing signatures and unfiled documents are routine to clean up when there is no deadline.
• Disclose problems early. A buyer who hears about an issue from you in week one adjusts. A buyer who discovers it in week eight wonders what else you have not said.

A company that is ready for diligence also runs better. Most of this is simply good housekeeping.

Final Thoughts

Diligence rewards preparation and punishes surprises. Founders who have their house in order keep their leverage and their price, and those who do not spend the last weeks of a deal negotiating from behind. If a buyer has started asking questions, or you want to be ready when one does, give me a call. It also helps to bring in M&A counsel and your accountant early.