What Are You Looking For?

You Want What? 8 Things You Weren’t Expecting During Due Diligence

Due diligence is the root canal of the merger and acquisition world. No matter how invasive we tell our clients it’s going to be, they always seem surprised and frustrated as it’s going on. While it is certainly no fun, knowing some of the areas where buyers will spend some time that might be considered off the beaten path, can be helpful in maintaining your cool during the process.

Due diligence has gotten much more extensive over the past 10 years. Very public investment failures have made financial and strategic buyers dig even deeper to look for whatever might be hiding. High valuations mean that there is hardly room for a business to stumble before the ROI calculation goes sideways. All this means more diligence.

While you are probably expecting the obvious financial diligence and some operational scrutiny, here are some very real examples of the unexpected parts of due diligence.

Environmental Questions – Even if You’re a Software Company

Even if you do something completely innocuous, totally paper-based or even online, you will be asked environmental questions. Your building’s history may be questioned, your offices will be checked for asbestos and there might even be a Phase I completed.

If your business is one where environmental issues may indeed be a concern, be prepared for even more scrutiny.

Security Practices and Disaster Recovery Plans

Sure this makes sensebuyers want to know that you have been running a safe company.  They also want to know that if there is an explosion or fire that you have a plan to recover important documents.  They want to know that you back up your files and store a second copy of your server in a remote cave in Guam where it can be accessed immediately in the event of emergency.   You get the idea.  You probably don’t have a cave in Guam, but you should be prepared to talk about your plans.  If you don’t have any, make some.

A Peek at Your Employee Manual

Because I work with founder-and-family held companies, seller frustration with this one comes up because most of my clients don’t have a huge (or any) HR department.  These companies certainly have policies, but may not have what some would consider a complete employee manual or handbook.  We can usually work around this by making sure we outline the company philosophy on the items about which the buyer really cares.  These are things like vacation time, sick day, jury duty, military service, and vacation day carry forward policies.  So we basically write a short employee handbook for them before we go to market.

Related Party Transactions

 This one sounds official (I always think of Enron and “special purpose entities”) but what the buyer wants to know about here are any transactions that may not continue once the business changes hands.  These typically show up when you rent your building from your brother at above market rates.  Or when you promise to use parts from the company that your dad owns.  We had a company where the owner’s wife was Director of Sales, but had never actually sold anything.  These are usually “normalized” and adjusted in the financial statements.  

Injury Records and Workers Compensation Claims Data

No one wants to buy a company with a culture that does not promote safety.  You can trot out your safety plan, all your training and educational materials, but at the end of the day buyers say “show me the money” and want to know who has been hurt and how often it happens.  Frequent workers compensation claims are not only costly from an insurance standpoint, they can also very much reduce what your company is worth.  

Personality Tests

This doesn’t happen on every transaction, but some buyers really like to have their managers take personality tests.  If you are considering selling to private equity, where the management team is more likely to stay with the company, these are often part of the diligence process.  I have never had a deal fall apart because of a personality test, but I have had business owners where I was really glad they didn’t have to take one.

Your Diplomas

Some buyers, in particular private equity buyers, will run background checks on the management team that is remaining with the company.  This means that they will check for criminal activity and make sure that the bio you put in the offering memorandum is legit.  I once worked on a transaction where our top salesperson went through a background check and was not able to produce his University of Denver diploma.  He claimed it was in his ex-wife’s garage, but after we told him to just order another from the school, he fessed up that he had actually never even been in the state of Colorado.  

Some companies take this even more seriously.  If your buyer is highly regulated they will be more stringent about a background check.  We had a private equity group that owned casinos and even though we were selling a manufacturing company, no one in the management team could have any kind of legal trouble in their past.  Ditto if your buyer works with the Government.  

Employee Shirt Sizes

And sometimes there are diligence requests that take everyone by surprise.  On one transaction we had a buyer that insisted on having all employee shirt sizes so that they could present them with new company shirts once the deal was closed.   This really was a challenge because we were not telling employees about the acquisition until it was done.  


Due diligence is an important time in a transaction where the buyer learns what they need to about a business.  It is also a time when frustrations can run high.  Your investment banker can assist with managing the due diligence process and will tell you if a request is crazy or pretty standard. 

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