What Startup Due Diligence Is Really Like

Nothing kills the high of an acquisition offer quite like due diligence. It’s a long, draining, and often nerve-wracking process. After celebrating the big offer, it can feel like a sudden shock to the system. Having been through two acquisitions myself, I can tell you that while it's definitely a grind, there’s a way to get through it without losing your mind. And that’s what I want to walk you through.

First things first, what exactly is this process?

Think of due diligence as the buyer’s chance to verify that your is everything you've claimed it is. It’s a lot like buying a used car—they’re going to pop the hood, take it for a spin, and ask a ton of questions to see if they can knock the price down. If you have hidden issues, you’re putting the entire sale, or at least your valuation, at risk. The buyer’s goal here is to uncover any skeletons in your closet, whether that’s messy contracts, hidden liabilities, legal disputes, or accounting errors. This process will touch every part of your business, but it will live primarily in your legal, accounting, and HR departments.

Getting Your Financials in Order

This is where the real heavy lifting happens. It’s also the area buyers love to use as leverage to lower your 's valuation. Don't give them the ammunition.

Can you produce annual and quarterly financial records for the last three to five years? Are this year’s projections on track? Does your EBITDA paint a healthy picture of the business?
Is your profit trending up or down? How solid are your financial forecasts for the next few years? Do you have the working capital to keep the lights on from now until the deal closes?
Are your tax returns from the last three to five years organized and accessible? Are there any unique local, state, or federal tax rules the buyer needs to be aware of?
Have your financial records been audited by a third party recently? Are all your debts and liabilities—current or potential—clearly documented? Are your projections for the future grounded in reality?

The Legal Deep Dive

If you have any lingering legal problems, a potential buyer will likely run the other way. You need to show them that your is either completely clean or that you have any existing issues firmly under control.

Do you have a complete file of all pending lawsuits, complaints, or legal claims? This includes anything in arbitration. Buyers will want to know where these issues came from, especially if they involve government bodies like the FDA or FTC.
If you’re in a regulated industry, is there a governing body that could block the acquisition? Have you had any antitrust issues in the past?
Are there any past or present environmental liabilities tied to your facilities? Do you handle hazardous materials, and if so, is your process for managing them buttoned up?

Protecting Your Intellectual Property

Often, a buyer is acquiring you specifically for your tech or intellectual property. This part of the diligence process is your chance to prove you’ve done everything right to protect those assets.

Can you provide a clear list of all your patents (including pending ones), trademarks, and copyrights? Do you rely on any third-party licensed software or tech that’s critical to your operations?
What steps has your company taken to protect its IP? How do you ensure confidentiality, and have there ever been issues with employees, past or present, violating those agreements? Have any trade secrets ever been compromised?
Are there any active disputes over your patents or IP? Is anyone else infringing on your rights?

It's All About the People

Sometimes, the buyer is just as interested in your team as they are in your product. Maybe they want your office locations or the specific expertise your employees have. You need to be ready to discuss how you manage and compensate your people.

What does your org chart look like? Who are the key employees, and are they likely to stick around after the sale? How easily will your team integrate into the buyer’s company culture?
Be prepared with a summary of all employee compensation and benefits, from retirement plans to company cars. What will the acquisition cost in severance payouts? Will you need to offer incentives to keep your key players on board?
Have you had any labor disputes? What about unresolved conflicts between employees or with management?

Understanding Your Customers and Market

Finally, the buyer wants to understand your place in the market. They are, after all, acquiring your customers, so they’ll want to know who they are and how you reach them. This is a critical step for any that has grown.

Who is your target audience? How loyal are they, and what’s their general satisfaction level? Is there a risk of them leaving after the acquisition?
Is your revenue cyclical or seasonal? How much of your revenue comes from your top handful of customers? What is your sales team’s commission structure?
Do you handle marketing in-house? Are your marketing messages compatible with the buyer’s brand? How will the acquisition impact your competitive standing?

Feeling overwhelmed? I understand. This is the final hurdle before the finish line, and it’s a big one. But the journey from a or a venture to an exit is always challenging. If you prepare for these questions and have the documents to back up your answers, the process can go smoothly. And remember, you don’t have to do it alone. Bringing in expert help can get you across that line with a check in hand. After all the work you put into your , you deserve to see it through.