What is the diligence process like in an acquisition?
Takeaway: The M&A diligence process is an exhaustive, "full-body scan" of your entire company led by the buyer's army of lawyers and accountants; being prepared with a clean data room is the key to surviving the scrutiny and closing the deal.
After you sign a Letter of Intent (LOI) to sell your company, you enter the most intense and grueling phase of the M&A process: due diligence. The buyer and their team of expert advisors—lawyers, accountants, and technical specialists—will conduct a deep and comprehensive investigation into every single aspect of your business. Their goal is to verify all of the claims you have made and, more importantly, to uncover any hidden risks or liabilities that could affect the value of the company they are about to acquire.
A founder must be prepared for the intensity of this process. It is a period of immense scrutiny where every corporate document, every contract, and every financial statement will be placed under a microscope.
The Diligence Request List
The process begins when the buyer's legal counsel sends you a diligence request list. This is a long and exhaustive checklist, often running over 20 pages, that requests hundreds of specific documents and pieces of information. The list will be organized into several key categories, including:
Corporate Records: All of your formation documents, board and stockholder minutes, and a detailed cap table.
Financials: Your historical audited financial statements, recent unaudited financials, and detailed financial projections.
Intellectual Property: A list of all patents and trademarks, and copies of every single Proprietary Information and Inventions Agreement (PIIA) signed by your employees and consultants.
Material Contracts: Copies of all significant customer, supplier, and partnership agreements.
Employees and Benefits: A list of all employees, their salaries and equity grants, and copies of all employee benefit plans.
Litigation and Compliance: Information on any pending or threatened lawsuits and details on your compliance with all applicable laws.
The Virtual Data Room (VDR)
Your job is to respond to this request list by uploading all the requested documents to a secure Virtual Data Room (VDR). This is why the proactive "sell-side" diligence we discussed earlier is so critical. If you have already prepared a clean and comprehensive data room, you can respond to the diligence request list quickly and professionally. If your documents are a mess, this phase will be a chaotic and stressful fire drill.
The Diligence Calls
In addition to the document review, the buyer's team will schedule a series of diligence calls with your key management personnel. Their lawyers will interview your legal team, their accountants will interview your CFO, and their technical experts will interview your engineering leads. You must be prepared to answer detailed and challenging questions in each of these sessions.
The diligence process is a marathon, not a sprint. It can take several weeks or even months to complete. A smooth, transparent, and professional diligence process is one of the best ways to build trust and confidence with your acquirer, paving the way for a successful closing.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.