M&A Due Diligence: What Buyers Examine — and How Sellers Can Prepare

Once a letter of intent is signed and a buyer enters the due diligence phase, the transaction shifts from negotiation to scrutiny. Buyers and their advisors examine your business systematically across every major category of potential risk. How prepared you are when this starts — and how well you organized before the process began — directly affects deal timeline, purchase price adjustments, and whether the transaction closes at all. For context on where diligence fits within the broader transaction, see our overview of the sell-side M&A process step by step.

This post walks through the major due diligence categories from the seller’s perspective and offers practical guidance on how to get diligence-ready before going to market.

What Buyers Are Actually Looking For

Due diligence is not just a checklist exercise. Sophisticated buyers are trying to answer three questions: Is the business what the seller represented it to be? What are the risks we are acquiring, and can we price them? Are there any deal-breakers? Every document request and every follow-up question is oriented toward those three questions. Sellers who understand this can anticipate concerns rather than react to them.

Corporate Records

Buyers review organizational documents — articles of incorporation or organization, operating agreements or bylaws, cap table, board minutes, and shareholder or member agreements. They are looking for clean governance, proper authorization of prior actions, and no hidden ownership interests or preemptive rights that could complicate the transfer.

Common issues: outdated or unsigned operating agreements, undocumented equity grants, and corporate formalities that were not observed (missing annual meeting minutes, no board resolutions for material transactions).

Material Contracts

Buyers request every material contract — customer agreements, supplier contracts, leases, license agreements, non-compete agreements, and joint ventures. They are evaluating customer concentration, contract terms (particularly assignability provisions and change-of-control triggers), and whether key contracts survive the transaction.

Change-of-control provisions deserve special attention. A customer contract that terminates upon a change of control — or requires customer consent to assignment — can significantly affect deal value if that customer represents a material portion of revenue.

Financial Statements and Quality of Earnings

Buyers and their accounting advisors conduct a quality of earnings (QoE) analysis that adjusts reported EBITDA for one-time items, owner perquisites, related-party transactions, and any revenue recognition or expense timing issues. The QoE figure becomes the negotiating baseline for purchase price.

Sellers whose financials are prepared with care and whose addbacks are well-documented close faster and with less friction. Sellers who arrive at diligence with inconsistent financial records or unexplained variances face buyer skepticism that is very difficult to reverse mid-process.

Employment and HR

Buyers review employee headcount, compensation, equity arrangements, key employee agreements, and any pending or threatened employment claims. California’s employment law environment is particularly demanding. Expect buyers to scrutinize wage and hour compliance, independent contractor classification, leave policies, and wage statement accuracy with the same rigor they apply to financial diligence.

Intellectual Property

Buyers confirm the company actually owns what it claims to own. A recurring issue: IP developed by founders or contractors who never signed proper IP assignment agreements, leaving ownership ambiguous. For technology businesses, software licensing arrangements, open source usage, and data ownership also receive detailed review — including a full cybersecurity due diligence workstream that has become standard in many deals.

Litigation and Regulatory Compliance

Buyers request disclosure of all pending and threatened litigation, regulatory inquiries, and governmental investigations. For regulated industries — financial services, healthcare, property management — regulatory compliance diligence can be as intensive as financial diligence.

How to Prepare

The most effective diligence preparation happens before the LOI is signed, not after. Working with your M&A attorney, you should: organize a virtual data room with clean, clearly labeled documents; identify and resolve known issues before a buyer discovers them; review all material contracts for assignability and change-of-control provisions; and prepare management to respond to buyer questions consistently and without over-sharing. Our M&A due diligence checklist for sellers sets out exactly what to prepare before going to market.

Sellers who prepare proactively move through diligence faster, encounter fewer surprises, and maintain leverage when issues do arise. Sellers who do not prepare hand that leverage to the buyer. For a high-level framework, see our guide on preparing to sell your business in four steps.

➤ Preparing to sell? Contact Petersen | Landis before your deal enters diligence.