The Autopsy of the Living: How to Survive Due Diligence Before It Happens

You spend years dreaming about the exit.

You imagine the phone call. You imagine the offer letter. You imagine the wire transfer hitting your bank account and the champagne popping in the office kitchen.

But you rarely imagine the part that comes in between the handshake and the wire transfer.

That part is called Due Diligence.

And it is where most deals go to die.

Imagine a team of forensic accountants, lawyers, and technical experts descending on your business with the sole purpose of finding a reason to lower the price or walk away entirely. They are going to open every digital drawer. They are going to read every email. They are going to look at every receipt from six years ago.

If your house is messy, they will find the mold.

For many founders, particularly those bootstrapping or running small teams, operational hygiene is usually the last priority. We focus on sales. We focus on product. We tell ourselves we will organize the Google Drive later.

But when “later” arrives in the form of an acquisition offer, it is too late.

You cannot reconstruct three years of financial logic in three weeks. The stress of trying to do so will distract you from running the business, leading to a dip in revenue right when you need to look your strongest.

This is why you must build your company as if you are selling it tomorrow, even if you plan to keep it for a decade.

The first place they will look is the money.

Most early-stage founders treat their business bank account like a personal piggy bank. They expense family dinners. They put their personal car on the company books. They categorize software subscriptions under vague headings like “Miscellaneous.”

To a buyer, this looks like chaos. Or worse, it looks like fraud.

You need to adopt accrual accounting early. Cash accounting is fine for the IRS, but it tells a terrible story about the health of your business. Accrual accounting matches revenue to the period it was earned, not when the cash hit the bank. This matters for valuation.

If you land a big contract in December and get paid up front, cash accounting says you had a huge December. Accrual accounting says you have a liability to deliver service for the next twelve months.

Buyers buy future cash flow. If your books are messy, they cannot predict the future.

Furthermore, you need to understand your own metrics. If you claim a certain Customer Acquisition Cost (CAC) or Lifetime Value (LTV), you need to be able to show the math. You cannot just use a spreadsheet formula you found on the internet.

You need to show the raw data that feeds the formula.

The second most common deal killer is Intellectual Property (IP) ownership.

This is a specific nightmare for tech companies.

In the early days, you likely hired freelancers. You likely had friends write some code. You likely used an agency for your logo.

Did every single one of those people sign a PIIA (Proprietary Information and Inventions Assignment) agreement?

If they did not, your company might not own its own product. In many jurisdictions, if a contractor writes code without a specific contract assigning the rights to you, they own the copyright.

Imagine trying to sell your software company to a tech giant, only to realize that a freelancer from 2019 technically owns the core algorithm.

The buyer will not take that risk. They will walk away.

You need to audit your contractor history today. Go back and get the signatures. It is awkward to ask for a signature three years later, but it is better than losing a ten million dollar deal.

Also, check your open-source licenses. If your engineers copy-pasted code from a library with a “viral” license (like GPL) into your proprietary stack, you might be legally obligated to make your entire codebase open source.

This renders your IP worthless.

Small business is built on trust. We make deals over coffee. We agree to partnerships via text message.

This works when you are the owner. It does not work when you hand the keys to someone else.

A buyer cannot buy a handshake.

They need to see the contract. If your biggest client has been with you for five years but you have no active contract with them, that revenue is considered “at risk.” The buyer will discount your valuation because that client could leave the day after the acquisition.

Every recurring revenue stream needs a paper trail. Every partnership needs a document defining the terms, the termination clauses, and the renewal dates.

This creates a conflict for many founders. We like being easy to work with. We hate bureaucracy. But paperwork is not just bureaucracy. It is an asset.

A business with locked-in, documented revenue is worth significantly more than a business with casual, handshake revenue.

For software businesses, technical due diligence is a brutal exam.

The buyer will have their engineers look at your code. They are not just looking for bugs. They are looking for “Technical Debt.”

They want to know if the system can scale. They want to know if it is documented. They want to know if the entire infrastructure exists solely in the CTO’s head.

If your code is a spaghetti mess of patches and quick fixes, the buyer sees a cost. They calculate how much money they will have to spend to rewrite it.

They will deduct that cost from your purchase price.

Documentation is the only defense here. You need architectural diagrams. You need API documentation. You need a setup guide that explains how to deploy the application.

This is the “Bus Factor” again. If your lead engineer gets hit by a bus, can the buyer’s team keep the lights on? If the answer is no, the deal is off.

There is a human element to this process that we rarely discuss.

Due diligence is invasive. It feels personal. You have spent years building this baby, and now a stranger is calling it ugly.

They will question your decisions. They will ask why you hired your cousin. They will ask why you spent so much on that failed marketing campaign.

If you are not prepared, you will get defensive. You will get angry. And you might blow up the deal.

You have to detach.

You have to view your business as a product, not an extension of your soul. When they criticize the books, they are not criticizing your character. They are assessing an asset.

This is why keeping clean books is an act of self-care. It removes the emotion from the transaction. When the data is clean, there is nothing to argue about. The numbers are the numbers.

So what should you do today?

Start building your Virtual Data Room (VDR).

This is simply a secure folder structure in the cloud. Create folders for Corporate, Legal, Financial, HR, Technology, and Sales.

Every time you sign a contract, put a PDF in the Legal folder. Every time you close a month of books, put the reports in the Financial folder. Every time you file a tax return, file it away.

Make this a monthly ritual.

It sounds tedious. It is tedious.

But there is a secondary benefit. When you organize your information, you understand your business better. You spot the trends. You see the risks before they become disasters.

We also have to ask a question about the future of diligence. With AI capable of analyzing thousands of documents in seconds, will diligence get faster, or will it just get more granular? Will buyers use AI to find risks that humans used to miss?

We do not know yet. But we know that clarity never goes out of style.

Building a company is hard. Selling a company is harder.

Do not let a missing signature or a messy spreadsheet be the reason you don’t cross the finish line.