Why Deals Die in Due Diligence
Due diligence is the phase where buyers verify everything you told them in the Letter of Intent. It is also the phase where most deals die, get repriced, or get loaded with earnouts.
The reason is simple: sellers are surprised by what buyers find. Issues that seemed minor — a customer contract without an assignment clause, a key employee without a non-compete, a revenue recognition policy that does not match GAAP — become deal-killers or price-reduction levers in the hands of a sophisticated buyer.
The solution is not to hide these issues. It is to find them first, fix what you can, and disclose what you cannot — before the buyer ever sees your data room.
The Five Due Diligence Categories
1. Financial Due Diligence
This is the most intensive category. Buyers will examine:
- Three to five years of financial statements (P&L, balance sheet, cash flow)
- Revenue by customer, by product/service line, by geography
- EBITDA normalization and add-backs
- Working capital analysis
- Accounts receivable aging and customer payment history
- Revenue recognition policies
- Deferred revenue and backlog
- Capital expenditure history and projections
What kills deals: Inconsistent revenue recognition, undisclosed related-party transactions, EBITDA add-backs that do not hold up to scrutiny, and customer concentration above 20%.
2. Legal Due Diligence
Buyers will review every significant contract, including:
- Customer contracts (assignment clauses, termination rights, auto-renewal)
- Vendor and supplier agreements
- Employee agreements (non-competes, IP assignment, confidentiality)
- Leases and real estate
- Intellectual property ownership and registration
- Litigation history and pending claims
- Corporate governance documents
What kills deals: Customer contracts without assignment clauses (the buyer cannot legally take over the relationship), IP that is not clearly owned by the company, and undisclosed litigation.
3. Operational Due Diligence
Buyers want to understand how the business actually runs:
- Key person dependency (what happens if the founder leaves?)
- Management team depth and retention risk
- Technology infrastructure and technical debt
- Process documentation and SOPs
- Customer support and satisfaction metrics
- Vendor relationships and concentration
What kills deals: Founder dependency so severe that the business cannot function without them, undocumented processes, and key employees without retention agreements.
4. Customer Due Diligence
Buyers will often conduct reference calls with your top customers. They want to understand:
- Customer satisfaction and NPS
- Contract renewal history
- Expansion revenue trends
- Customer perception of the business post-acquisition
What kills deals: Customers who express dissatisfaction, contracts that are up for renewal immediately after close, and high churn in the trailing 12 months.
5. Technology Due Diligence (for software companies)
For SaaS and software businesses, buyers will examine:
- Code quality and technical debt
- Security vulnerabilities and compliance (SOC 2, GDPR, HIPAA)
- Infrastructure scalability
- Open-source license compliance
- Data backup and disaster recovery
What kills deals: Security vulnerabilities, non-compliant open-source usage, and infrastructure that cannot scale.
How to Prepare
Build a Virtual Data Room Early
Organize all of your due diligence materials into a virtual data room (VDR) before you go to market. This signals professionalism, reduces buyer anxiety, and accelerates the process.
Conduct a Pre-Sale Quality of Earnings
A Quality of Earnings (QoE) report, prepared by an independent accounting firm, validates your EBITDA and revenue claims before buyers do their own analysis. It is the single most effective way to prevent financial due diligence surprises.
Fix What You Can
If you find issues during your own pre-sale audit — contracts without assignment clauses, employees without non-competes, IP not clearly assigned to the company — fix them before going to market. Most issues can be resolved with 6–12 months of preparation.
Disclose What You Cannot Fix
If there are issues you cannot fix (a pending lawsuit, a customer who has expressed intent to leave), disclose them proactively in your CIM. Buyers who discover undisclosed issues in due diligence lose trust — and trust is the foundation of every deal.
The Bottom Line
Due diligence is not something that happens to you. It is something you prepare for. The founders who achieve the best outcomes are the ones who have already answered every question a buyer will ask — before the buyer asks it.
Take the Exit Readiness Assessment to identify your due diligence gaps before buyers do.
Topics
Pete Martin
Founder & Lead Advisor, Vestara Advisors
Pete Martin is the founder of Vestara Advisors and has advised on dozens of sell-side M&A transactions for B2B tech and services founders. Before founding Vestara, Pete sold his own company to a KPMG portfolio firm at 12× EBITDA. He brings both sides of the table to every engagement.