Due Diligence Preparation: What Buyers and Investors Actually Look At

Due diligence is where deals go to die. Not because the business is bad, but because the financial documentation is bad. We’ve seen seven-figure deals fall apart over missing bank reconciliations, unexplained intercompany transfers, and revenue recognition that couldn’t survive scrutiny.

Here’s what buyers and investors actually examine during due diligence, and how to prepare so your deal doesn’t become a cautionary tale.

The Financial Diligence Checklist

Historical Financials (3 Years)

Audited or reviewed financial statements for the last 3 fiscal years, plus year-to-date interim statements. Accrual basis, GAAP-compliant. If you’ve been running on cash basis, you’ll need to convert, and the conversion itself will face scrutiny.

Revenue Quality

This is where diligence teams spend the most time. They want to understand: recurring vs. non-recurring revenue mix, customer concentration (no single customer should represent more than 15-20% of revenue), revenue growth drivers and sustainability, contract terms and renewal rates, and revenue recognition methodology.

Working Capital Analysis

AR aging, AP aging, inventory analysis (if applicable), prepaid expenses, deferred revenue. The buyer will build a working capital model and use it to adjust the purchase price. Every dollar of excess or deficit working capital affects deal economics.

Cost Structure

Detailed expense analysis by category with trend data. They’re looking for: owner/founder compensation that needs normalization, one-time costs that should be added back, related-party transactions, and cost trends that suggest margin pressure.

Tax Compliance

Federal and state tax returns for 3 years. Sales tax nexus analysis. R&D credit documentation if claimed. Any open audits or disputes. Tax liabilities are deal-killers if undisclosed.

The Data Room

Build your data room proactively. Organize it into clear folders: financial statements, tax returns, legal documents, contracts, HR/employment, IP, insurance, and regulatory. Index every document. A well-organized data room signals operational maturity and accelerates the process.

Red Flags That Kill Deals

• Inconsistencies between tax returns and financial statements
• Large unexplained journal entries (especially near period-end)
• Related-party transactions without documentation
• Customer concentration above 25%
• Missing or incomplete bank reconciliations
• Revenue recognition that doesn’t match contract terms

Do This Monday

1. Pull your last 3 years of financial statements and tax returns. Do they tell a consistent story? If there are discrepancies, resolve them now.
2. Calculate your customer concentration. If any single customer represents more than 20% of revenue, develop a plan to diversify.
3. Start building a data room, even if no deal is imminent. Use Google Drive or Dropbox with clear folder structure. Add documents as they’re created. It’s dramatically easier to maintain than to build under pressure.

If you want help preparing for due diligence, book a free consultation →