Nearly half of the letters of intent that collapsed last year didn’t fail due to price or financing. They fell apart over what buyers found, or couldn’t find, in the data room. According to Axial’s dead-deal data, issues uncovered during due diligence outrank all other causes.
This is a critical insight for owners planning to sell. Almost every problem that derails a deal in its final stages could have been addressed with sufficient time. The challenge lies in tackling tasks that are often overlooked or deemed unimportant.
The Unseen Work That Makes or Breaks a Deal
The tasks that determine a successful sale are rarely glamorous. They include updating entity charts and revisiting customer contracts finalized via email years ago.
Starting this process two years in advance is key. It allows owners to address critical issues like customer concentration, contract assignability, and EBITDA quality without raising red flags during a live deal.
What Buyers Really Look For
Buyers seek consistency between a company’s paperwork and its owner’s narrative. They value organized, verifiable information over perfection. Common oversights include:
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- Financial discrepancies: Inconsistent trial balances, tax returns, and bank statements can lead to unfavorable assumptions.
- Contractual risks: Anti-assignment clauses in key agreements may require multiple consents, increasing deal complexity.
- Equity clarity: Unresolved option grants, SAFEs, and ex-employee equity can complicate closing.
- IP and regulatory compliance: Missing IP assignments or permits can signal unpreparedness.
Pre-Market Preparation and Timing
The data room serves as an early indicator of diligence readiness. Buyers assess document organization, response speed, and accuracy. A disorganized data room may unfairly signal a disorganized business, influencing buyer perception.
The Role of Quality of Earnings
Quality of earnings (QoE) is a major factor in deal retrades. Buyers scrutinize add-backs and one-time EBITDA boosts, often adjusting multiples downward. A modest EBITDA revision at an eight-times multiple can significantly impact the final price.
Commissioning a sell-side QoE analysis allows sellers to address these issues proactively. It transforms EBITDA claims into evidence, strengthening negotiations.
While the data room is the first test of diligence readiness, modern platforms are evolving. Tools like VDR.ai use AI to reconcile documents, flag inconsistencies, and identify missing information—tasks once done manually.
The Two-Year Advantage
A simple exercise can reveal readiness: simulate a buyer’s diligence request and attempt to fulfill it within ten business days. Any gaps identified should be addressed over the next two years.
