What Happens During Due Diligence?
Due diligence is the buyer's detailed investigation of your business through document review, management interviews, and operational analysis. Prepare organized documentation, be transparent about issues, and expect the process to take 4-8 weeks.
What Buyers Investigate
Financial Due Diligence
Documents needed:
- 3+ years of audited or reviewed financial statements
- Monthly financial statements for current year
- Detailed revenue breakdowns by customer, product, geography
- Cash flow statements and working capital analysis
- Tax returns and any tax issues or audits
- Budget and forecast models
What they're looking for: Revenue quality, margin trends, cash generation, accounting practices
Legal Due Diligence
Documents needed:
- Corporate structure and cap table details
- All material contracts: customers, vendors, partnerships, leases
- Employment agreements and compensation plans
- Intellectual property: patents, trademarks, copyrights, licenses
- Any litigation, disputes, or regulatory issues
- Insurance policies and claims history
What they're looking for: Legal risks, contract terms, IP ownership, compliance issues
Operational Due Diligence
Information needed:
- Customer lists, retention rates, and satisfaction metrics
- Sales pipeline and conversion data
- Key operational metrics and KPIs
- Technology infrastructure and security documentation
- Organizational charts and employee details
- Vendor relationships and dependencies
What they're looking for: Business sustainability, operational risks, scalability
The Due Diligence Process
Data Room Setup
Create a virtual data room with organized folders:
- Financial information
- Legal documents
- Operational data
- Technology and IP
- Human resources
- Customer and vendor information
Pro tip: Have everything ready before you need it—don't scramble during the process
Management Presentations
Expect to present to various buyer teams:
- Financial overview and projections
- Market position and competitive landscape
- Technology architecture and roadmap
- Operations and key processes
- Team structure and capabilities
Expert Reviews
Buyers often bring in specialists:
- Accountants for financial analysis
- Lawyers for legal review
- Technology experts for systems assessment
- Industry experts for market validation
- HR consultants for people evaluation
Best Practices for Due Diligence
Be Proactive and Transparent
- Flag potential issues upfront rather than hiding them
- Prepare explanations for any unusual items
- Anticipate questions and have answers ready
- Update documents regularly as new information becomes available
Stay Organized
- Assign someone to manage the data room and requests
- Track what's been provided and what's still needed
- Maintain version control on all documents
- Keep a log of all questions and responses
Manage Your Business
- Don't let due diligence distract from running the company
- Keep key employees focused on their jobs
- Maintain customer relationships and satisfaction
- Hit your financial targets during this period