Preparing for Due Diligence

Surprises in Due Diligence (That Should Not Have Been Surprises) I’ve seen good companies lose millions in value—not because of bad businesses, but because of surprises that should never have happened. Exhibit A. Unassigned IP A co-founder left years ago. No assignment on file. A core module traced back to their laptop. Outcome: 4 weeks of scramble, outside counsel, extra escrow, and permanent price tension. Exhibit B. Sales Tax Exposure Nexus in 5 states after outbound growth. No registrations. No filings. Outcome: Buyer models a seven-figure risk. Structure shifts. More holdback. Closing delayed. Exhibit C. Customer Contracts That Don’t Transfer Half of the top 10 accounts had anti-assignment language. Outcome: Buyer refuses to fund until consents arrive. Two customers negotiate discounts. None of these were malicious. They were invisible—until diligence made them visible. Root Causes I See Again and Again - Records scattered in emails and memory - Cash accounting hides obligations - Legacy entities never cleaned up - Vendor/customer templates reused for years - “Too busy” for a pre-sale audit How to Prevent This with a Boring Routine Intellectual Property – Signed assignments for every founder, contractor, and employee. Domains, code, and accounts in the company’s name. Taxes – State registrations aligned with where you sell. Sales & payroll filed and paid. A simple nexus memo. Contracts – Standard terms that allow assignment. Draft consent letters ready. Financials – Accrual books, clean revenue recognition, add-back log, 12-month working capital schedule. Corporate – Clean entities, updated minutes, grants, cap table, and insurance certificates. The Disclosure Rule That Protects Value If a smart buyer will ask, prepare the answer. If the answer is messy—fix it. If you can’t fix it, disclose it early with context and a plan. ❌ Surprises invite retrades. ✅ Calm disclosure builds trust. You don’t need perfection to close. You need no surprises. 👉 Want to know what buyers will look for before you hit diligence? Check the Sellability Checklist in the comments. #MandA #ExitPlanning #DueDiligence #BusinessValuation #FounderAdvice

EUDR Trial Runs in the Netherlands The Dutch competent authority for the EUDR, the Nederlandse Voedsel en Warenautoriteit - NVWA, recently conducted pilot inspections with 25 companies across all EUDR commodities (except timber). Only 40% of the inspected companies complied with the EUDR requirements Here are the key lessons from these 'dry runs': 1. Due diligence goes beyond gathering information Collecting data is only the first step. Companies must also evaluate and assess risks based on that information. 2. Platforms support, but do not replace due diligence Digital platforms can help collect data and structure risk assessments. But companies must remain informed about the information applied, the evidence behind conclusions, and keep supporting documents as part of their due diligence. 3. Certification does not replace due diligence Certification alone does not fulfill due diligence obligations. It can serve as a risk mitigation measure provided you clearly understand which risks it addresses. 4. Integrated due diligence works better Due diligence is most effective when it is embedded into day-to-day business operations, rather than treated as a separate, stand-alone process. 5. Due diligence is required for all topics Some sectors already have due diligence practices in areas such as human rights or deforestation. For the EUDR, however, companies must address all relevant topics, building on existing work while closing any gaps. Example: identifying and mitigating the risk of mixing with products of unknown or deforested origin. 6. Linking the product to its location of origin Besides verifying that a sourcing location meets EUDR requirements, you must be able to guarantee traceability in that the product marketed in the EU originates from that location. https://lnkd.in/eEAE3Ymn

As I've posted, Issuu was acquired by Bending Spoons two weeks ago, so while it's still fresh, I want to share some tips and things I learned along the way that I hope will be helpful for anyone thinking about or going through a large tech acquisition as we just completed. Legal and accounting due diligence can take as much time or more than product and technical due diligence. Most companies are prepared for tech diligence, with their code easily accessible for third party code reviews and are prepared with roadmaps and financial models. But there are a whole host of legal, HR and accounting diligence documents and pieces of information that matter a lot, but often aren't fully available, resulting in last minute scrambles to pull these documents and information from different sources, causing delays or even potentially deductions on the price. Even with a full HR or legal software system, inevitably some of this information is in an email thread somewhere or didn't get properly uploaded. After spending the last 6 weeks compiling and sharing this kind of information with regular updates to a virtual data room, I recommend implementing a process of real rigor around organizing and regularly updating all of this information from the start of a company. Executives at start ups are constantly having to make compromises and decisions around where to spend time. It's easy to miss filing or organizing a document here and there or say I'll get to it over the weekend. It's better to spend the time along the way to have ALL potential material well organized because once diligence starts, it's more intense than anyone, even folks who are seasoned at this, expected, and it moves fast. The materials are being reviewed by people who aren't familiar with the company, so make it as easy as possible for them to digest it quickly Buyers generally aren't purposely demanding seemingly obscure documents to cause frustration, but they do want information to be comprehensive given that they are going to be taking on the company. The bigger a virtual data room gets, the more challenging it can be to easily access the right docs, even if they are complete. Sampling of Specifics....Makes sure to have: -Each employee properly classified -All PIIA docs signed for all employees -All historical tax docs, including obscure docs that might be related to overseas subsidiaries -cap table and all option grants approved and clear -exact titles, contact details and specific fund names for all investors/shareholders -clear documentation of all open source software -easily explainable banking flow, especially between subsidiaries #TechAcquisition #SellingACompany #StartUpLife #CorpDev #MergersAndAcquisitions #MandA #TechMandA

I’ll never forget the day I opened my inbox and saw that email: “Please provide your company’s data room for diligence.” My heart sank. At the time, we’d never pulled together an official data room. It felt like scrambling to study for a final exam you never knew you had. But that jolt of panic ended up being one of the best lessons we’ve learned about running a startup. Diligence can mean a lot of different things. You might be raising capital, getting acquired, merging with a strategic partner, or even securing legal approvals. Regardless, underneath all those scenarios, you’ve got to document everything. That means bank statements, financial projections, IP documentation, etc. Basically anything that touches your business is fair game. It’s all about risk in an investor’s eyes. Angels might gloss over the details, but institutional funds will demand a complete, organized view of your business. And believe it or not, having that data room ready is a huge confidence booster for them and for you. Of course, every investor’s process is different. Some dig into every microscopic detail. Others just skim your dashboards and pitch deck. Either way, you want your ducks in a row: - A clean cap table - A polished data room - A response for every curveball Looking back, that email forced us to level up way earlier than we would’ve otherwise. If you’re reading this and feeling the nerves creeping in, don’t sweat it. Take control now, so that when the diligence email hits your inbox, you’re not blindsided, you’re ready. – JB

In M&A, getting to a term sheet demands exceptional execution during pre-diligence. Where your acquirer focuses their diligence depends on their purpose for acquisition: 🔹 Product-driven acquirers scrutinize your tech stack, IP ownership, and integration needs. 🔹 Talent-focused buyers dig deep into team retention and expertise validation. 🔹 Revenue-focused acquirers zero in on customer concentration and expansion metrics. That part is strategy. After years in tech M&A, I've watched countless founders stumble by preparing generically rather than strategically during pre-diligence. Exceptional pre-diligence readiness means: ✅ Mapping your data to their acquisition thesis; ✅ Structuring information for their internal approval process; ✅ Anticipating strategic concerns before they surface. Most founders try to sell the story of their own roadmap and strategy. This can leave you with a calendar of looky-loos. These are the five crucial elements of pre-diligence preparation: 💰 Revenue dynamics: Not just growth metrics, but revenue concentration as aligned with the acquirer’s top-line strategies or markets; 🛠️ Technical architecture: This isn’t about your stack choices as much as it is to show how your infrastructure enables or limits integration with theirs; 👥 Team composition: Your organizational structure by function, tenure, and location reveals operational maturity; 💡 IP foundation: Clean ownership matters; and 📈 Customers: Customer concentration (top 10), expansion patterns, and retention validate your impact to their growth goals. The quality of your pre-diligence can determine if you get a term sheet at all. My book Sail to Scale gives more detail and insights to managing successful exits. Pick it up on Amazon today. Comment below—what helped you get through diligence? #techstrategy #startups #enterprise #M&A

Due diligence doesn’t kill deals. But your finance operations can. When an investor or acquirer looks into your finances, they’re not just looking at your P&L. They’re looking for confidence in your numbers. The number one finance operations mistake that shows up during due diligence is inconsistent financial data. • Revenue is reported one way in the P&L, another way in the CRM. • Cash flow statements don’t match the underlying transactions. • Forecasts are disconnected from actuals. To a buyer, inconsistency equals risk, and risk gets priced into the deal, or worse, kills it entirely. If you want a strong exit or investment, you need bulletproof finance ops before you start talking to buyers. 5 things you need to do to make sure your finance ops is deal-ready: 1. Clean & Reconcile Historical Financial Data • Ensure all historical financial statements are accurate, consistent • Eliminate discrepancies between the P&L, balance sheet, cash flow • Align accounting policies across subsidiaries or business units 2. Standardize Revenue Recognition & Reporting • Apply consistent revenue recognition policies • Remove one-off adjustments that make earnings appear inflated • Document all key assumptions 3. Strengthen Forecasting & Budget Processes • Ensure rolling forecasts align with actual results • Integrate sales, operations, and finance forecasts into one model • Prepare multiple scenarios to show risk readiness 4. Document Key Finance Processes & Controls • Map out processes for AP, AR, payroll, inventory, and reporting • Show internal controls that prevent fraud, and major errors • Show a clear month-end close timeline and workflow 5. Organize All Due Diligence Materials in Advance • Build a virtual data room with financials, tax returns, contracts, debt • schedules, KPIs, and compliance documents. • Include explanations for unusual items, fluctuations, or one-time costs • Make sure everything is formatted and labeled To get deal-ready, part of your plan should be cleaning and aligning your finance operations. If you’re even thinking about an exit in the next 2 years, the time to clean up your ops is now. Not during due diligence. ---------- Please share your thoughts in the comments. ♻️ Repost if you feel this will benefit your network. Follow me, Beverly Davis, for more strategic finance insights.

𝐓𝐡𝐞 𝐂𝐫𝐢𝐭𝐢𝐜𝐚𝐥 𝐑𝐨𝐥𝐞 𝐨𝐟 𝐃𝐮𝐞 𝐃𝐢𝐥𝐢𝐠𝐞𝐧𝐜𝐞 𝐢𝐧 𝐈𝐝𝐞𝐧𝐭𝐢𝐟𝐲𝐢𝐧𝐠 𝐑𝐞𝐝 𝐅𝐥𝐚𝐠𝐬 𝐢𝐧 𝐀𝐠𝐫𝐞𝐞𝐦𝐞𝐧𝐭s🚩 Due diligence is a fundamental step in mitigating risks and verifying the accuracy of information before entering into a business transaction or contract. Yet, it is often underestimated or overlooked. A thorough due diligence process helps decision-makers identify potential red flags, allowing them to make informed choices—whether to proceed, renegotiate terms, or walk away from a deal. 𝐖𝐡𝐲 𝐃𝐮𝐞 𝐃𝐢𝐥𝐢𝐠𝐞𝐧𝐜𝐞 𝐌𝐚𝐭𝐭𝐞𝐫𝐬: ✅ 𝐃𝐞𝐭𝐞𝐜𝐭 𝐅𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐈𝐫𝐫𝐞𝐠𝐮𝐥𝐚𝐫𝐢𝐭𝐢𝐞𝐬: Inconsistent records, high debt levels, or signs of financial instability can indicate potential fraud. ✅ 𝐀𝐬𝐬𝐞𝐬𝐬 𝐋𝐞𝐠𝐚𝐥 & 𝐂𝐨𝐦𝐩𝐥𝐢𝐚𝐧𝐜𝐞 𝐑𝐢𝐬𝐤𝐬: Investigating the history of individuals and companies involved can reveal ongoing or potential lawsuits, regulatory violations, or contractual disputes. ✅ 𝐒𝐭𝐫𝐞𝐧𝐠𝐭𝐡𝐞𝐧 𝐍𝐞𝐠𝐨𝐭𝐢𝐚𝐭𝐢𝐨𝐧 𝐋𝐞𝐯𝐞𝐫𝐚𝐠𝐞: Identifying risks early enables you to renegotiate terms, request additional guarantees, or restructure the agreement to protect your interests. 𝐊𝐞𝐲 𝐀𝐫𝐞𝐚𝐬 𝐨𝐟 𝐃𝐮𝐞 𝐃𝐢𝐥𝐢𝐠𝐞𝐧𝐜𝐞: ▶️ 𝐋𝐞𝐠𝐚𝐥 𝐃𝐮𝐞 𝐃𝐢𝐥𝐢𝐠𝐞𝐧𝐜𝐞 – Assess contractual obligations, pending litigations, and regulatory compliance. ▶️ 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐃𝐮𝐞 𝐃𝐢𝐥𝐢𝐠𝐞𝐧𝐜𝐞 – Evaluate business operations, supply chain dependencies, and management practices. ▶️ 𝐈𝐧𝐭𝐞𝐥𝐥𝐞𝐜𝐭𝐮𝐚𝐥 𝐏𝐫𝐨𝐩𝐞𝐫𝐭𝐲 𝐃𝐮𝐞 𝐃𝐢𝐥𝐢𝐠𝐞𝐧𝐜𝐞 – Protect against IP risks, including ownership disputes and infringement concerns. ▶️ 𝐅𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐃𝐮𝐞 𝐃𝐢𝐥𝐢𝐠𝐞𝐧𝐜𝐞 – Verify financial statements and uncover potential liabilities. A well-executed due diligence process is not just a formality—it’s a strategic advantage. 𝐈𝐝𝐞𝐧𝐭𝐢𝐟𝐲 𝐫𝐢𝐬𝐤𝐬 𝐞𝐚𝐫𝐥𝐲, 𝐧𝐞𝐠𝐨𝐭𝐢𝐚𝐭𝐞 𝐛𝐞𝐭𝐭𝐞𝐫 𝐭𝐞𝐫𝐦𝐬, 𝐚𝐧𝐝 𝐬𝐞𝐜𝐮𝐫𝐞 𝐬𝐮𝐜𝐜𝐞𝐬𝐬𝐟𝐮𝐥 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬 𝐨𝐮𝐭𝐜𝐨𝐦𝐞𝐬.

𝗘𝘅𝗶𝘁 𝗥𝗲𝗮𝗱𝗶𝗻𝗲𝘀𝘀 𝗦𝘁𝗮𝗿𝘁𝘀 𝘄𝗶𝘁𝗵 𝗮 𝗚𝗖 Your portco is heading for a high-valuation exit. Then due diligence uncovers a compliance gap. Valuation drops by millions. Deal terms shift. Momentum stalls. This isn’t a hypothetical. I’ve seen it happen. Too often, it starts with treating legal as an afterthought. In fast-growing portcos, it’s easy to focus on scaling revenue and operations while assuming legal risks can be handled later. But that mindset can backfire when exit time comes around. In my experience, some PE firms zero in on growth and operational improvements, assuming legal exposure can be managed reactively. Top-performing firms take a different approach. They build legal strategy into exit planning from day one. 𝗪𝗵𝘆 𝗜𝘁 𝗠𝗮𝘁𝘁𝗲𝗿𝘀 A well-positioned GC keeps the legal foundation strong from acquisition through exit. Whether it’s protecting IP, maintaining compliance, or cleaning up contracts, they reduce the risk of last-minute surprises that can tank valuation. 𝗛𝗲𝗿𝗲’𝘀 𝗪𝗵𝗮𝘁 𝗜𝘁 𝗟𝗼𝗼𝗸𝘀 𝗟𝗶𝗸𝗲 I’ve seen this dynamic play out across sectors, especially in highly regulated industries like healthcare, tech, and financial services. The GCs who lay the groundwork early often make the biggest difference during diligence. One example: a GC I placed at a PE-backed healthcare company built a compliance framework early in the hold period. When exit time came, the buyer’s diligence team found no red flags. No gaps in data privacy, regulatory compliance, or contract integrity. The result: a smooth deal at the targeted valuation. 𝗞𝗲𝘆 𝗩𝗮𝗹𝘂𝗲 𝗗𝗿𝗶𝘃𝗲𝗿𝘀 • 𝗗𝘂𝗲 𝗗𝗶𝗹𝗶𝗴𝗲𝗻𝗰𝗲 𝗣𝗿𝗲𝗽: GCs surface and solve potential deal-breakers long before bankers draft the CIM. • 𝗥𝗶𝘀𝗸 𝗠𝗮𝗻𝗮𝗴𝗲𝗺𝗲𝗻𝘁: Ongoing oversight helps neutralize liabilities before buyer scrutiny. • 𝗦𝗺𝗼𝗼𝘁𝗵 𝗘𝘅𝗶𝘁𝘀: Strong governance boosts buyer confidence and supports stronger exit multiples. • 𝗗𝗮𝘁𝗮 𝗜𝗻𝘀𝗶𝗴𝗵𝘁: Portcos with a dedicated GC see 15% higher exit multiples on average (2024 PE industry data). 𝗧𝗵𝗲 𝗗𝗶𝗳𝗳𝗲𝗿𝗲𝗻𝗰𝗲 𝗧𝗼𝗽-𝗣𝗲𝗿𝗳𝗼𝗿𝗺𝗶𝗻𝗴 𝗙𝗶𝗿𝗺𝘀 𝗠𝗮𝗸𝗲 Top-performing PE firms don’t treat legal readiness as a final checklist item. They treat it as infrastructure, baked into the business from the start. We’ve placed GCs who integrated compliance into day-to-day operations. So when buyers started asking questions, there were no fire drills. Just clean answers. At MLA, we’ve partnered with PE sponsors to place GCs who positioned their companies for exit and protected valuation when it mattered most. What’s the biggest legal challenge you’ve faced preparing a portco for exit? #PrivateEquity #ExitStrategy #GeneralCounsel