Due Diligence Expectations

by Michael Schroeder

Upon execution of a Letter of Intent (LOI), a buyer will likely commence an extensive due diligence process. This later-stage part of the deal cycle is absolutely critical to a successful transaction, but is something not often discussed or fully understood by potential sellers ahead of time. Through a LOI, a buyer is putting forth, in good faith, the general terms on which they are agreeing to close, though it is important to note that most of these terms, most notably the purchase price, are non-binding and subject to further due diligence. Given the non-binding nature of a LOI, if certain items are uncovered in future due diligence that are considered to be adverse, a buyer may look to renegotiate the original terms, which could include a reduction in purchase price. Rarely, if ever, will a seller see the purchase price increase after signing a LOI. 

The due diligence process can be a fatiguing and trying time and will most likely take 60 to 120 days. Sellers often feel as if they are working a second full-time job through the process as documents being gathered and supplied to a buyer may exceed 1,000 files. Buyers aren’t looking to make it difficult on a seller (even though certain diligence requests might seem unnecessary at times), but buyers do need to take the proper precautions prior to closing, especially if they are paying for goodwill and investing others’ money (e.g. private equity). During what can be a difficult stretch physically and mentally, it is important for sellers to stay focused towards the end goal. The following sections highlight some of the key components of what takes place in due diligence and to better prepare a seller on what to expect.

Financial & Accounting Due Diligence

Due diligence often commences with a review of financial and accounting procedures, which can be lengthy and very tedious. The process is to confirm that the financials and any presented earnings can be relied upon, among other items.  It is not uncommon for a buyer to engage a third-party to conduct a “Quality of Earnings” report. Any proposed EBITDA adjustments or add-backs will be scrutinized and need to be supported with proper rationale and documentation. If the financials are not accurate or there are inconsistencies, this can become more time consuming and potentially problematic. It is often best for a seller and its trusted advisors to review the financials at least a year ahead of a sale process to ensure everything is being properly represented.

Business Due Diligence

Building off of the financial and accounting due diligence, a buyer needs to understand the key drivers and dynamics of the business and the sustainability of future performance. This may include a SWOT analysis, detailed review of products or service offerings and pricing strategies, along with customer surveys or direct conversations. In addition, a buyer will also want to understand internal items such as available capacity, condition of key assets, future capital needs, key employees, benefit plans and labor retention rates, among others.

Legal Due Diligence

A buyer, along with its legal team, will look to review several legal documents and topics ranging from corporate paperwork to customer contracts. Common corporate requests include original documentation and any amendments associated with articles of incorporation, bylaws, corporate minutes and stock transfers. In addition, all customer, supplier and vendor contracts will be reviewed to understand the various terms and conditions. Assignability clauses or liabilities being assumed through the contracts are common areas to be reviewed in detail. In addition to legal documents, a buyer would logically also seek to review all recent and historic litigation.

Environmental Due Diligence

Every industry has different environmental exposures and risks, but a seller at a minimum should expect a few questions and an on-site inspection. If selling real estate as part of the transaction (and sometimes even if leasing the real estate), an Environmental Phase I can be expected and possibly a Phase II depending on the initial results. These are common “check the box” items that mitigate a buyer’s risk exposure and provide a baseline for future analysis.

Integration Due Diligence

With confirmatory due diligence wrapped up or nearing finalization, a buyer will start to focus on integration and post-transaction operations. A buyer will need to ensure it has the infrastructure in place to operate post-close. This will certainly include in-depth reviews and planning, and can be very challenging to ensure a smooth transition. If the buyer is strategic in nature, this could include the integration of IT and HR into existing platforms or potential consolidation efforts. Further, a strategic buyer may start developing marketing and operational plans to realize synergies immediately upon closing. Most importantly, a buyer will want to make a determination they have the right people in key functional roles to support the business post-transaction.


While due diligence can be exhaustive and encompasses much more than the items summarized above, being properly prepared can make it a smoother process for everyone. Working with the right team of advisors leverages their capacity and experience to help alleviate the burden on a seller, present diligence items appropriately and at the suitable time, and provide guidance throughout to mitigate changes after the LOI, all of which increases the certainty to close and ensures that a seller’s best interests are represented at all times throughout the process.

For more information or to explore any questions you might have regarding this article or mergers and acquisitions, please contact Michael Schroeder, vice president, at ms@taureaugroup.com or any member of the Taureau Group team at 414-465-5555.