M&A Readiness: What Buyers Diligence First

8 min read

Dariia VasylievaFounder & CEO, GETVISION

Buyers diligence the financials first. Before they spend money on lawyers and technical reviews, they want to know whether the earnings are real: how revenue is recognized, which adjustments hold up and how much working capital the business needs. Then they move to the contracts that carry the revenue, the IP, the people and the technology.

The order follows where losses come from after a deal. Aon's 2026 Global Transaction Solutions Claims Study found that, on representations and warranties insurance policies placed in North America since 2019, financial statements accounted for 38% of paid losses, followed by material contracts (21%), compliance with laws (15.1%) and intellectual property (11%). Buyers and their insurers have learned where to look.

This checklist covers the six areas buyers diligence first, the red flags in each and how to run vendor due diligence so you find problems before the buyer does. For the full sale timeline, see our guide to planning a strategic exit.

Key takeaways

Buyers start with quality of earnings, because financial statement breaches drive the largest share of post-deal losses.
Revenue is only as good as the contracts behind it, so find every change-of-control clause before a buyer does.
Customer concentration and founder dependence take the longest to fix, so they need the earliest start.
Vendor due diligence lets the seller find, fix or disclose problems on its own timetable instead of the buyer's.
What you disclose before signing protects you after closing, when many claims arrive.

Why the order of diligence matters

Diligence costs money, so buyers sequence it. Financial and commercial work usually comes first, because it decides whether the price holds. Legal, technical and people diligence follow, often in parallel once a letter of intent is signed.

Diligence also does not end at signing. Aon's study found that approximately 51% of claims on these policies were notified more than 12 months after closing, in many cases after the seller's escrow had expired. Whatever a buyer finds later will be compared with what you disclosed. An accurate disclosure letter protects the seller far better than a clean-looking one.

The six areas buyers diligence first

Financial quality of earnings

A quality of earnings review tests whether reported earnings reflect the sustainable performance of the business. Buyers check:

Revenue recognition, especially multi-year contracts, implementation fees and deferred revenue.
Adjustments to EBITDA, and which one-off costs are really one-off.
Net working capital and its seasonality, which set the purchase price adjustment.
Related-party transactions and any revenue from shareholders or their companies.
Cash conversion, meaning whether profit turns into cash.

SRS Acquiom's 2026 M&A Deal Terms Study found purchase price adjustments in well over 90% of private-target deals. The working capital target is part of the price, not an accounting footnote.

Legal, corporate and IP

Buyers verify that the company owns what it sells. That means a complete cap table with every issuance documented, board and shareholder approvals in the minute book, licenses in good standing, and IP assignments from every founder, employee and contractor who wrote code or created the brand. Open-source licenses in the codebase get reviewed too. Our guide to cap table hygiene covers the ownership side.

Customers and concentration

Buyers rebuild revenue customer by customer: who pays, how much, on what contract and for how long. They look at the share of revenue from the largest customers, retention by cohort, pricing history and pipeline quality. High concentration is rarely fatal, but it moves into the price, the earnout or the escrow.

Contracts and change-of-control clauses

A change-of-control clause gives a counterparty the right to consent to, renegotiate or terminate a contract when the company is sold. Buyers search customer, supplier, lease, licensing and financing agreements for these clauses, along with exclusivity, most-favored-nation and non-assignment terms. Material contracts were the second-largest source of paid losses in Aon's study.

People and retention

A buyer acquires a team as much as a product. Expect questions on key employee contracts, option vesting and acceleration on a sale, retention risk, employment disputes and whether restrictive covenants are enforceable where your people work. Confirm the last point with employment counsel in each jurisdiction.

Technology, security and data

Technical diligence reviews architecture, scalability, technical debt, security incidents and data protection compliance. For AI products, buyers also ask where the training data came from and whether the company has the rights to use it.

The M&A readiness checklist

Use this table as a self-assessment 12 to 24 months before a sale. Every red flag you find needs an owner and a fix date.

Area	What buyers request	Red flag	Fix before sale
Financials	Audited and monthly accounts	Restatements, aggressive adjustments	Audit, sell-side QoE
Revenue	Contracts and invoices by customer	One client dominates	Diversify, lengthen terms
Corporate	Cap table, minutes, approvals	Undocumented issuances	Ratify and reconcile
IP	Assignment agreements	Code owned by contractors	Sign assignments
Contracts	Material agreements	Termination on change of control	Seek consents early
People	Key contracts, option plan	One person holds key accounts	Build a second line
Technology	Architecture and security review	Unreported incidents	Remediate and document
Compliance	Licenses, policies, filings	Gaps in regulated activity	Regularize with counsel

Every red flag you find first is a red flag you get to explain.

Vendor due diligence: finding it before the buyer does

Vendor due diligence (VDD) is diligence the seller commissions on itself before going to market: usually a financial report from accountants, and often legal and tax reports too. Buyers receive the reports in the data room, and the advisors who prepared them can provide reliance to the winning bidder.

Why it pays:

Control: you find issues on your own timetable and decide whether to fix, explain or disclose them.
Speed: every bidder starts from the same base, which shortens their diligence.
Price protection: fewer surprises after the letter of intent means fewer reasons to renegotiate.

How to run it:

Scope the reports with your M&A advisor, based on the likely buyer set.
Run a sell-side quality of earnings review covering recent full years and the current year to date.
Commission legal VDD on corporate records, contracts, IP and employment.
Fix what can be fixed, and prepare clear explanations for what cannot.
Build the data room in the same structure as the reports. Our investor-grade data room guide gives a section template.
Draft the disclosure letter early and keep it current until signing.

When GETVISION advises owners preparing a strategic exit, this diagnostic is usually the first workstream, because what it finds sets the timetable for everything else.

Red flags that take longest to fix

Some problems can be fixed with a signature. These three cannot, which is why they belong at the top of the plan.

Customer concentration

What it looks like: one or two customers account for a large share of revenue, often on short or terminable contracts.

Why it hurts: the buyer sees a business that could lose much of its value with one phone call, and prices it that way.

The fix: start diversifying well before a sale, and lengthen contracts with the largest customers where they will agree.

Founder dependence

What it looks like: the founder owns the key customer relationships, the product roadmap and every senior hiring decision.

Why it hurts: the buyer must either keep the founder through a long earnout or accept the risk that the business stalls without them.

The fix: build a second line of leaders and move key accounts to them while you still run the company.

Unreliable numbers

What it looks like: management accounts that change after month-end, revenue recognized inconsistently, or no audit history.

Why it hurts: if the buyer cannot trust the base year, every forecast built on it is discounted.

The fix: move to audited accounts and a disciplined monthly close well before the process, so buyers see a clean track record rather than one clean year.

Frequently Asked Questions

Most buyers start with financial quality of earnings: revenue recognition, EBITDA adjustments, working capital and cash conversion. Customer contracts, IP, people and technology follow, often in parallel after a letter of intent.

A quality of earnings report is an accountant's analysis of whether a company's reported earnings reflect sustainable performance. It normalizes one-off items, tests revenue recognition and sets out the working capital the business needs to operate.

For a competitive sale process it usually is, because it lets the seller find and fix issues early, shortens buyer diligence and reduces the risk of price cuts after exclusivity. For a small bilateral deal, a focused internal review may be enough.

It is a contract term that gives a counterparty rights, such as consent, renegotiation or termination, if ownership of the company changes. Buyers look for these clauses in customer, supplier, lease, licensing and financing agreements.

It is insurance, usually bought by the buyer, that covers losses from breaches of the seller's representations in the purchase agreement. SRS Acquiom's 2026 study identified it on approximately 46% of the private-target deals it reviewed, and deals that use it tend to have much smaller escrows.