| Series 3: Transaction Readiness • Article 1 of 3 | Valley Spire Insights |
Due diligence does not create problems. It reveals them. The businesses that close smoothly are the ones that fixed those problems before a buyer ever walked through the door.
What Due Diligence Actually Looks Like
Owners who have never been through a transaction often underestimate both the scope and intensity of due diligence. A buyer acquiring a business in the $3M-$50M revenue range will typically engage a team that includes transaction lawyers, accountants conducting a quality of earnings analysis, and sometimes operational or environmental specialists. They will request access to years of financial records, every material contract, corporate governance documents, employment agreements, intellectual property records, insurance policies, and regulatory filings. The process typically runs eight to fourteen weeks, though it can extend significantly when the seller cannot produce requested documentation in a timely fashion. Every delay creates two problems: it extends the timeline, which introduces deal fatigue and increases the risk that market conditions or buyer enthusiasm shift, and it signals to the buyer that the business may not be as well-managed as the seller represented. That second problem is the more expensive one. A buyer who starts finding gaps early in due diligence begins looking for gaps everywhere. The financial cost of a poorly managed due diligence process is not abstract. I have seen transactions where unresolved issues discovered during due diligence resulted in purchase price reductions of $200,000 to $500,000, either through direct repricing, expanded indemnification requirements, or holdback provisions that tied up a significant portion of the seller’s proceeds for twelve to twenty-four months after closing. In several cases, deals that were otherwise solid fell apart entirely because the cumulative effect of multiple unresolved issues eroded the buyer’s confidence.Corporate Records: The Foundation Nobody Maintains
The first thing a buyer’s lawyer will request is the corporate minute book. For many businesses in this size range, this is where the trouble starts. Annual resolutions have not been passed. The share register is not current. Director and officer appointments are not properly documented. Share transfers that happened years ago were never formally recorded. None of these issues are fatal. All of them are fixable. But discovering them during due diligence means a lawyer scrambling to reconstruct years of corporate history under time pressure. That remediation work is expensive – typically $10,000 to $30,000 depending on the complexity – and it creates an immediate impression of a business that has not been professionally managed. A preventive corporate records review, done twelve to eighteen months before going to market, costs a fraction of the remediation cost and eliminates one of the most common early-stage due diligence complications entirely.THE COST OF BEING UNPREPARED
A typical due diligence process on a business in the $5M-$30M revenue range involves 150 to 300 individual document requests. Sellers who have organized their records proactively can respond within days. Sellers who have not typically need four to eight additional weeks to locate, compile, and in some cases reconstruct the required documentation. That delay alone can cost $50,000-$100,000 in additional professional fees on the seller’s side, and significantly more in deal value if the buyer uses the delays as leverage to renegotiate terms.
Contracts, Assignability, and Change of Control
After corporate records, the contract portfolio is the area that most frequently produces surprises. Many commercial contracts – customer agreements, supplier agreements, equipment leases, software licenses, real property leases – contain clauses that restrict assignment or give the other party specific rights on a change of ownership. These are called change of control provisions, and they exist in far more contracts than most business owners realize. The risk is straightforward. If a key customer contract requires consent for assignment and that consent is not obtained, the buyer is acquiring a business where a material revenue relationship could be terminated at close. If the building lease requires landlord consent for an ownership change and the landlord is uncooperative, the entire transaction can stall. A systematic contract audit, conducted well before any sale process begins, eliminates these surprises. Identify every material contract, read the assignment and change of control provisions, and where consent is required, start those conversations proactively. This is far easier to accomplish when there is no active deal on the table and no time pressure driving the conversation.The People and Intellectual Property Gaps
Two areas consistently catch business owners off guard in due diligence: employment arrangements and intellectual property ownership. On the employment side, many businesses in the $3M-$50M range operate with informal arrangements for key staff. No written employment agreements. No non-solicitation provisions. No confidentiality clauses. The working relationship has been built on trust, and it has worked well for years. But a buyer looking at that business sees something different: a company where a key manager could leave on closing day, take critical customer relationships or proprietary knowledge with them, and there would be no contractual protection whatsoever. That is a risk buyers will price into the deal, and in some cases it is a risk they will not accept at all. Intellectual property presents a related problem. Common gaps include software not properly licensed, IP developed by contractors who may retain ownership, trademarks registered to an individual rather than the company, and proprietary systems that have never been formally documented. For businesses where IP is a meaningful component of value – and that includes most service and technology-enabled businesses – these gaps can materially affect both the valuation and the buyer’s willingness to proceed. Both of these issues are straightforward to resolve with advance planning and extremely difficult to resolve under the time pressure of an active transaction. Putting proper employment agreements in place is a routine legal exercise when there is no deal pending. Doing it while simultaneously telling key employees that the business is being sold is a fundamentally different conversation.Starting the Audit Before They Do
The business owners who have the smoothest transactions are the ones who conduct their own due diligence before a buyer ever appears. They review their corporate records, audit their contracts, formalize their employment arrangements, confirm their IP ownership, and resolve any outstanding legal or regulatory exposures. They do this not because a deal is imminent, but because operating at that standard of readiness is good business practice regardless of whether they sell. Legal readiness does not change what a buyer pays or what you keep after tax. It determines whether the deal actually closes – and whether it closes at the price you agreed to, or at a price that has been discounted because the buyer found problems you could have fixed. The next article in this series covers the financial story – how to present your financials so buyers see the full value of your business, and how the way you document your numbers directly affects both the valuation and the buyer’s confidence in the deal.A buyer’s due diligence team will find everything. The only question is whether they find problems you have already solved, or problems you did not know you had.
UP NEXT IN SERIES 3: TRANSACTION READINESS
Article 2 – How to Present Your Financials So Buyers See Full Value: Your financial statements were designed to satisfy your accountant and the CRA. A buyer reads them with a completely different set of questions – and the way you present your numbers determines whether they see the full value of what you have built.
Want to know where your business stands on due diligence readiness?
Our Sale Readiness Assessment takes about 10 minutes and gives you a clear picture of the factors that may be supporting, or limiting, your readiness for exit. Take it at valleyspire.com.
If your business generates over $10M in revenue and you would prefer to talk through your situation directly, we also offer a complimentary confidential conversation.
