The Letter of Intent is signed. Everyone celebrates. Then the buyer sends a 12-page due diligence request list. Suddenly, the transaction feels very different.
The buyer wants financial records, customer contracts, employee information, tax returns, insurance policies, leases, intellectual property records, and answers to questions the owner may never have considered before. That’s when some sellers discover an uncomfortable truth: the business they know intimately isn’t necessarily the business they’ve documented.
According a recent survey by BNY Wealth survey, only 48% of sellers are ready when buyer due diligence begins.
Here are seven areas that often deserve more attention than sellers expect.
1. “Adjusted EBITDA” That Doesn’t Survive Scrutiny
Owners often have reasonable explanations for expenses they believe should be added back: unusual legal costs, one-time investments, excess owner compensation, personal expenses, or other non-recurring items.
The buyer’s question is different: Would this expense truly disappear after the transaction, or is it part of the normal cost of operating the business?
The more adjustments a seller presents, the more important the documentation becomes. A buyer needs to be able to independently validate the earnings being used to support the transaction.
2. Customer Concentration
An owner may look at a customer representing 20% of revenue and think, “We’ve had them for 15 years.”
A buyer will ask:
- Is there a contract?
- When does it renew?
- Can the customer leave?
- Who owns the relationship?
- How difficult would it be to replace the revenue?
Customer concentration isn’t automatically a problem. The real question is how much risk sits behind the concentration.
3. The Business Depends Too Much on the Owner
A simple test: What would happen if the owner disappeared for a week or two? If the answer is “not much,” that’s a good sign.
If the answer is “the business would struggle to function,” a buyer is likely to see key-person risk. A strong management team is both an operational benefit and makes the business easier for a buyer to underwrite.
4. The Financials Are Accurate but Hard to Understand
Messy financial reporting doesn’t necessarily mean bad accounting. A company can have accurate books and still make diligence unnecessarily difficult if it can’t easily explain things like revenue by customer, margins by business line, recurring revenue, customer retention, or unusual expenses.
Clear, consistent financial information gives a buyer greater visibility into the underlying economics of the business.
5. Working Capital Becomes a Negotiation
Owners naturally focus on the headline purchase price. But the transaction also has to answer: How much working capital should the buyer receive with the business at closing?
Accounts receivable, inventory, accounts payable and other operating assets and liabilities all affect that calculation. If the buyer and seller disagree about what constitutes “normal” working capital, it can become a meaningful point of negotiation.
6. Contracts and Legal Obligations
Some of the most important issues don’t appear on the income statement.
Buyers may review:
- Customer and vendor contracts
- Leases
- Employment agreements
- Intellectual property
- Insurance
- Litigation
- Regulatory requirements
- Change-of-control provisions
A seller may think: “We’ve had this customer for ten years.”
The buyer may ask: “Can that customer terminate the agreement if the company is sold?”
7. The Things Management Didn’t Know It Didn’t Know
This may be the most important category. A buyer can ask a question that reveals an issue the owner never considered material. Maybe an important employee has no formal agreement. Maybe the company relies heavily on one supplier. Maybe intellectual property ownership isn’t fully documented. Maybe customer retention is strong, but nobody has actually measured it.
None of these necessarily kills a transaction. But they create questions. And questions create diligence.
The goal is to understand the business well enough that surprises are minimized and issues can be addressed before they become negotiating problems.
The strongest sellers are the ones who know what their issues are, understand them, and can explain how the business manages them.
Bottom line: Diligence reveals whether the seller already understands the issues and gets ahead of them with their advisors.
For an owner considering a sale, that’s why preparation matters long before the LOI is signed.
