What a buyer's diligence list looks like
After the letter of intent is signed, the buyer sends a list. It is long, and it covers every part of the business: financial statements and tax returns, customer and supplier contracts, leases, licenses, employees and their terms, insurance, claims and disputes, systems, and anything else that could change the earnings the buyer has underwritten.
The buyer's accountants run a Quality of Earnings review on the numbers. The buyer's lawyers read the contracts. Its operating team asks how the work actually gets done. Every answer is checked against the CIM, against the documents in the data room, and against what management said in the meetings.
None of this is hostile. A buyer is about to pay a multiple of earnings for a business it did not build, and diligence is how it makes sure the business is what it was told. But it is thorough, and it happens at the point in the process when the founder has the least leverage.
Every business has issues. The only question is who finds them first.
The diligence flags method
The alternative to waiting for the buyer's list is to write it yourself. The Diligence Flags section of every deal workbook does one thing: it lists what a buyer will find, marks each flag yellow or red, and tells the founder what to do about it.
Each flag is recorded the same way: the finding, our observation about it, and the read-through to price or structure. Then each is sorted on two questions. How much would it affect price or deal certainty? And how easily can it be fixed before going to market?
- High impact, easy to fix: fix it now. Cash-basis books, a license in the owner's name, undocumented add-backs, missing contracts. Fix these before launch. They are the highest return on effort in the whole process.
- High impact, hard to fix: frame it. Customer concentration, a down year, a pending claim. These cannot be fixed in time. Disclose them early, with context and a plan, and never let a buyer discover them.
- Low impact, easy to fix: tidy. Small housekeeping items. Fix them as a batch, early.
- Low impact, hard to fix: note and move on. Minor legacy issues. List them in the data room and do not spend time on them.
Knowing which is which is most of the value. A founder who spends months on a low-impact issue while a high-impact one goes unframed has done the work in the wrong order.
The list ends where a buyer's begins: with the information requests a buyer would make. Working through them before going to market shows which documents exist, which need to be found, and which need to be created, and it is the fastest way to build a data room that answers questions before they are asked.
This works best when someone who thinks like the buyer's team does it, at arm's length from the business. A founder knows the business too well to see it the way a stranger will. That familiarity is exactly what a buyer does not have.
Ten flags that come up again and again
Every business is different, but founder-led businesses tend to raise the same flags. These ten are worth checking for in any business before it goes to market.
- Customer concentration. One customer, or a few, account for a large share of revenue.
- Owner dependency. The founder holds the relationships, the pricing, or the license, and the business has not shown it can run without them.
- Books on a cash basis, or never reviewed. Revenue and costs are recorded when cash moves, and no outside accountant has looked at the statements.
- Add-backs without documents. Adjustments to earnings that the founder can explain but cannot prove.
- Personal expenses in the business. Costs that belong to the founder run through the company, blurring what the business really spends.
- A license in the owner's name. A license the business needs to operate belongs to the founder, not the company.
- Missing or non-assignable contracts. Key customer or supplier relationships with no written agreement, or agreements that cannot move to a new owner without consent.
- Related-party arrangements. A lease from the founder's property company, costs shared with another business the founder owns, or several entities that need to become one clear story.
- Earnings that are hard to call normal. A strong year, or a weak one, that makes it difficult to say what the business earns in an ordinary year.
- A pending claim. A lawsuit, a dispute, or a regulatory matter that has not been resolved.
None of these is fatal on its own. Each one is a reason for a buyer to lower the price, defer part of it, or ask for more protection, unless it has already been dealt with.
Fix versus frame
Some issues can be fixed in the months before a sale. Books can move to an accrual basis. Add-backs can be documented. Contracts can be written down and signed. A license can sometimes be moved. These are the fixes, and they come first, because each one removes a flag entirely.
Other issues cannot be fixed in time. A large customer cannot be diluted in a few months. A down year cannot be undone. A claim takes as long as it takes. For these, the work is framing: explaining the issue, its cause, what has been done about it, and why it matters less than it first appears. A customer concentration that comes with a long contract, a long relationship, and a plan to diversify reads very differently from one a buyer discovers on its own.
A down year is framed the same way: what caused it, whether the cause has passed, and what the months since show. Earnings below a recent peak can be explained, and priced fairly, when the founder can show what a normal year looks like and why.
Framing is not spin. It is disclosure with context. The facts are the same. What changes is who presents them, when, and with what evidence.
Why disclosure timing decides price
The same issue costs different amounts depending on when a buyer learns about it.
Disclosed before offers, an issue is part of the business the buyers are bidding on. They price it, alongside everything else, while competing with each other. Discovered after exclusivity, the same issue arrives when the buyer has no competition and the founder has stopped talking to anyone else. It becomes a reason to revisit the price, and the founder's alternative is to start over.
Discovery also costs credibility. A buyer that finds one undisclosed issue starts looking for the next, and every remaining answer is read with more suspicion. Diligence slows, questions multiply, and the buyer's confidence in the earnings it underwrote falls.
Disclosure also has a form. A known issue belongs in the CIM or the data room, stated plainly with its context, and ready to be discussed in management meetings. Buried in an appendix, or mentioned only when asked, it reads as concealment even when nothing was hidden.
That is why the most valuable time to diligence a business is before any buyer does. Fix what can be fixed. Frame what cannot. Then go to market with nothing left for a buyer to discover that you have not already explained.
Diligence yourself before a buyer does.