Due Diligence: What a Buyer Actually Checks Before Wiring the Money

Founders imagine an acquisition as a handshake and a wire transfer. In reality, the handshake is the beginning of the most invasive examination your company will ever go through. Between the signed letter of intent and the money arriving sits due diligence: weeks or months in which the buyer's lawyers, accountants, and engineers go through everything you have ever done, looking for reasons to lower the price or walk away. Deals die here more often than anywhere else.

What the data room contains

Due diligence runs through a data room — a organized set of folders the buyer works through methodically. The categories are predictable, which means you can prepare them long before any buyer appears.

The questions that kill deals

Most deals do not die from one dramatic discovery. They die from accumulation: small inconsistencies that make the buyer stop trusting the numbers. Revenue recognized differently than described in the pitch. A cap table that does not match the stock ledger. A "proprietary" product built largely on a contractor's unsigned work. A key customer who, when called as a reference, sounds lukewarm.

The single most dangerous pattern is surprise. A buyer who finds a problem you disclosed upfront prices it in and moves on. A buyer who finds a problem you hid — or genuinely did not know about — starts wondering what else is hidden, and the price drops or the deal dies.

How long it really takes

Plan for sixty to ninety days from letter of intent to close for a straightforward small acquisition, and longer for anything complex. The letter of intent usually includes an exclusivity period — often 45 to 60 days — during which you cannot talk to other buyers. That exclusivity is the buyer's leverage: if diligence drags past it, the price conversation reopens, and rarely in your favor. Momentum matters. Respond to requests within a day, and have the data room ready before the letter of intent is signed, not after.

What to prepare a year in advance

The founders who sail through diligence started a year early. Get every contractor and employee to sign IP assignment agreements — and find the old ones who never did. Clean up the cap table and make sure the stock ledger matches it. Move revenue recognition to something an accountant would recognize. Write down the informal arrangements: the handshake discount, the verbal partnership, the side agreement with a cofounder. And run your own mock diligence: have your lawyer and accountant play buyer and tell you what they would find.

The cost of diligence — and who pays it

Diligence is expensive even when it goes well. Legal and accounting fees for the seller commonly run into the tens of thousands of dollars, and the founder's time cost is larger still: for two or three months, a meaningful share of your attention goes to answering requests instead of running the company. Budget for both before you sign the letter of intent.

This creates a real risk founders underestimate: the deal distracts the business, the quarter softens, and the buyer uses the soft quarter to renegotiate. The defense is to keep the company performing. Delegate diligence responses to a small team — usually your lawyer, your accountant, and one trusted operator — and keep yourself focused on the numbers the buyer is watching. A deal that closes at the agreed price with a business that kept growing is worth far more than the hours you personally saved by answering every email yourself.

Also know what the buyer is spending. A serious buyer burns real money on diligence too — lawyers, accountants, sometimes technical reviewers. That sunk cost works quietly in your favor: a buyer deep into diligence wants to close. It does not protect you from a genuine problem, but it means small issues are usually priced or fixed rather than fatal, as long as you disclosed them early and honestly.

Finally, plan for the deal to fail. Until the money moves, keep the company running as if no offer exists: hiring, shipping, and spending as normal. Founders who put the business on hold for a deal that then falls through face the worst of both worlds — no exit and a stalled company.

Common mistakes

• Signing a letter of intent before the data room is ready.
• Hiding a problem and hoping it stays buried. It never does.
• Letting diligence stall. Every quiet week invites a price cut.
• Treating diligence as the buyer's problem. Speed and completeness are your job.
• Forgetting the team. Buyers are acquiring the people as much as the product; key employees need a reason to stay.

After the wire: the obligations that remain

Closing is not quite the end. Most acquisitions include an escrow or holdback — typically 10 to 15 percent of the price, held for a year or more against any problems that surface later — and many include an earn-out tied to future performance. The representations you made in the purchase agreement survive closing, so a sloppy answer given in diligence can come back as a claim against the escrow long after you have celebrated. Keep the diligence record: the data room contents, the disclosure schedules, and the questions you were asked. If a dispute arises two years later, that record is your defense. The founders who treat diligence as a one-time chore often learn this the hard way; the ones who treat it as building a permanent record of a clean company sleep much better after the wire arrives.

How the game models it

In Garage to IPO, acquisition offers reflect what is actually on your books: clean financials, owned code, and a stable team produce better offers than a flashy top line with chaos underneath. That is exactly how real buyers think. The headline number is negotiated in a day; what you actually keep is decided by what diligence finds.

Diligence is not a hurdle between you and the sale. It is the sale. Prepare for it like one.