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Due Diligence

The buyer's deep, post-LOI investigation of a company's financials, operations, and legal standing before signing the definitive purchase agreement.

What Due Diligence Is​

Due diligence is the stretch between a signed letter of intent and a binding deal, when the buyer opens up the company and inspects everything: the books, the tax returns, the contracts, the operations, the legal exposure. Burlingham defines it plainly as the in-depth investigation a buyer conducts before negotiating the definitive purchase-and-sale agreement. McDannell frames it as the post-LOI deep examination of financials, operations, and legal, and is blunt about where it sits in the arc of a sale:

"It's not finding the buyer that's the hardest part. It's from LOI to the date that money is wired into the account."

McDannell, Get Acquired, ch. 7

This is the phase where deals die. McDannell notes that diligence is "where many deals fall apart," most often because the financials do not reconcile with what the seller claimed earlier in the process.

What the Buyer Looks At​

Diligence runs along three tracks: financial, operational, and legal. The financial track is the most dangerous, because it tests whether the numbers in the CIM and the listing hold up under scrutiny. On larger deals, Warrillow explains, the buyer commissions an outside CPA to run a quality of earnings (Q of E) review reconciling reported EBITDA against the figures the seller presented.

"A Q of E report can often be a milestone, enabling an acquirer to consider a major portion of their due diligence completed."

Warrillow, The Art of Selling Your Business, Appendix B

Burlingham adds a warning about the financial track: owners who treated the company as a personal piggy bank and now lean on aggressive add-backs to inflate earnings invite buyers to challenge those numbers in diligence, where the inflation gets exposed. The kind of buyer also shapes the experience. As Burlingham observes, financial buyers hunt for grounds to cut the price, while strategic buyers who plan to keep the seller on tend to use diligence simply to validate what they already believe.

The Seller's Position​

The seller's leverage is weakest exactly here. Warrillow argues that signing the no-shop clause attached to most LOIs swings power to the buyer, who can then drag diligence out and reopen terms. The defenses are preparation and competition: nail the numbers, be transparent, keep the process moving, and cap diligence at roughly sixty days. McDannell's prescription is to have the records ready before diligence even starts, then wait for the buyer's checklist, much of which will be irrelevant. Above all, honesty is non-negotiable, because a single caught misstatement poisons the whole investigation:

"If they catch one lie, the first thing they're going to think is if they're lying about this, what else are they lying about?"

McDannell, Get Acquired, ch. 7

Deal Fatigue and Retrading​

The grind of diligence is itself a risk. McDannell describes deal fatigue as the exhausting examination that wears sellers down and makes them vulnerable to caving on price, and she ties it to a hard rule of momentum:

"Time kills all deals."

McDannell, Get Acquired, ch. 7

Diligence is also where retrading happens. Warrillow distinguishes legitimate retrading, when the buyer discovers a genuine material problem, from bad-faith retrading, a deliberate bait-and-switch after the seller is locked into exclusivity. The best protection is to surface problems early and keep the diligence period short.

Further Reading​

Sources: McDannell, Get Acquired ch.7; Burlingham, Finish Big ch.3, ch.8; Warrillow, The Art of Selling Your Business ch.14, Appendix B.