So, you’re getting ready to sell your business, and you went shopping for someone to handle due diligence. You got a couple of quotes and went with a firm that could handle it quickly and inexpensively. The data room was organized. The financials were clean. Every document the buyer requested was there within a day.
All good, right?
Wrong.
Then the buyer's quality of earnings report came back. Several add-backs were disallowed, the working capital target moved, and a sales tax exposure nobody flagged turned into a price reduction. Then, the next thing you know, the deal closes, but for millions less than the number on the letter of intent.
Why? Because you tried to save a little money on due diligence.
This is the most common way sellers lose value. It’s rationalized as part of the negotiation. It wasn’t; it was a lack of preparation. Yes, you saved some money on due diligence, but it was incredibly costly in the end.
Most sell-side "diligence" is really document organization. It answers one question: can you produce what the buyer asks for? A typical engagement delivers:
None of that is wrong. It is necessary. But it is preparation for the buyer's diligence, not diligence of your own. It tells you your files are in order. It does not tell you what a sophisticated buyer will do with them.
Organized files are table stakes, not real strategy or preparation.
Real sell-side diligence looks at your company the way the buyer's team will, before the buyer does. It has three jobs.
1. Prove what drives your value. Your price is a multiple of earnings, so every dollar of earnings has to survive scrutiny. That means:
2. Find what can hurt your value before the buyer finds it. Every issue a buyer discovers after the LOI becomes leverage against you. Common ones:
3. Protect you at the negotiating table. Knowing your numbers is only half the job. The other half is using them:
The first kind of diligence gets you ready to be examined. This kind gets you ready to negotiate and defend your value.
The buyer across the table is not winging it. Private equity firms and strategic acquirers run diligence with dedicated quality of earnings teams, tax specialists, and deal counsel. They do this dozens of times a year. You will likely do it once, in other words, don’t bring a knife to a gunfight.
Timing is their advantage. Most findings surface after you sign the LOI, when exclusivity has taken your other buyers off the table. Each issue becomes a reason to revisit price, and you no longer have a competing offer to push back with. In the industry, this is called a retrade, and it is routine.
Here is how it adds up on a hypothetical company with $4.0M of EBITDA and an LOI at 6.0x.
|
What the buyer finds |
What happens |
Value lost |
|
Add-backs not documented |
$400K of add-backs disallowed, EBITDA drops to $3.6M |
$2.4M |
|
Customer concentration and owner dependency |
Multiple revised from 6.0x to 5.5x |
$1.8M |
|
Working capital target set high |
Target set $750K above your normal operating level |
$0.75M |
|
Unfiled sales tax in two states |
Price reduced to cover exposure |
$0.6M |
|
Total |
$24.0M LOI becomes $18.45M |
$5.55M (23%) |
And that is before structure. A buyer with leverage will often push part of the price into an earnout or seller note. Move 20% of the remaining price there, and another $3.7M depends on performance you no longer control.
Now compare that to the fee difference you were weighing. If thorough diligence costs $75,000 more than the checklist version, compare that to the erosion above as a function of a lack or praparation. Fast and cheap diligence does not save money. It moves the cost to the closing table, where it is measured in multiples.
A lower headline price is only the first hit. The damage just compounds from there.
Your after-tax proceeds shrink further. When the buyer controls the negotiation, they also shape the structure. An asset sale or an unfavorable purchase price allocation can push more of your gain into ordinary income. You lose value on the price, then lose more of what is left to tax.
More of your money arrives later, if at all. Escrows, holdbacks, and earnouts grow when a buyer sees risk. That is money tied to indemnity claims and performance targets after you have handed over the keys.
Your estate planning window closes. Many of the most effective wealth transfer strategies work best before a sale, while the business can still be valued on its own terms. Once a deal is effectively agreed, those windows narrow and some close entirely. Diligence that starts late leaves no room to use them.
The result is not a bad quarter. It is a permanently smaller number: less for your retirement, less for your children, less for the causes you care about. You spent decades building the value. A few weeks of rushed preparation decides how much of it you keep.
Price is easy to compare. Scope is not. Before you choose based on the fee, ask:
If the answer to most of these is no, you are not buying diligence. You are buying a data room.
The buyer will do deep diligence on your business no matter what. The only question is whether you are prepared for it with your own diligence.
At Cunningham & Associates, diligence is not a checklist. It is a full look at what drives your company's value, what could erode it, and how to protect it from the first conversation through closing. We bring tax, M&A, and wealth strategy to the same table so the number you negotiate is the number you keep.
If a sale is on your horizon, even two, three, or more years out, now is the time to find out what a buyer will find. Schedule a conversation with our team, and we will show you where your value stands today and what you can do to protect and enhance it.