Run Diligence Like a Buyer, Not a Prosecutor

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Diligence asks a buyer to go looking for problems while the seller watches. Materiality, decided before you start, is what keeps thoroughness from turning into the thing that loses the deal.

In the last piece I made the point that a signed letter of intent does not end the seller’s evaluation of the buyer. It opens the phase where that evaluation gets most intense, because now the seller is watching the buyer act on a live deal rather than talking in a meeting. That phase is due diligence, and it is where a buyer either confirms the seller’s fears about who they are dealing with or puts them to rest.

The difficulty is that diligence asks the buyer to do the one thing most likely to trigger those fears. The buyer is supposed to go looking for problems. That is what diligence is. You are examining the business closely enough to find what is wrong with it before you own it, and a buyer who does not do that thoroughly is being careless with a great deal of their own money. So the instinct every buyer brings to diligence is to find everything, turn over every stone, and question everything that does not immediately add up. Followed without discipline, that instinct is exactly what loses deals, because a seller on the other side of a buyer who is picking at everything starts to wonder what it is going to be like to deal with this person through a transition, or as a partner if they are rolling equity, or as the new owner of the company their employees and customers depend on.

The discipline that solves this is materiality, and the most useful version of it is a decision the buyer makes before diligence even begins. Set a materiality level at the start. Decide, before you are in the weeds, what size of issue actually matters to this deal, what would genuinely change the value or the risk of the business, and hold yourself to it once you are in. A buyer who sets that threshold in advance is a buyer who cannot later talk themselves into treating a small finding as a big one just because they found it and it is sitting there. The threshold is what keeps thoroughness from hardening into a fishing expedition.

The first place it applies is where you put your own attention. Focus on the material items and leave the immaterial ones alone. The point is not to miss things but to keep from putting every minor discrepancy under a microscope. When a buyer starts interrogating small stuff, a supplier invoice that looks slightly off, a minor inconsistency in how something was booked three years ago, a rounding difference in a schedule, the seller gets defensive, and they get defensive at exactly the wrong moment, because you are spending their patience on things that do not matter and you will need that patience intact when a material issue does come up. A seller who has spent two weeks feeling nitpicked is not in a generous frame of mind when you finally reach the item that genuinely warrants a hard conversation. Spend your scrutiny where it counts.

The second place it applies is with your own team, and this is the part buyers most often overlook, because they are thinking about their own conduct and not their advisors’. A buyer can be perfectly reasonable in every direct interaction with the seller and still have the relationship damaged by the people working diligence on their behalf. Your accountant, your attorney, the appraisers, the environmental consultants, anyone you bring in to examine the business is, to the seller, an extension of you. The seller does not separate the buyer from the buyer’s agents. If your attorney is combative, or your accountant treats every add-back as though it were an attempted fraud, or an appraiser or environmental advisor conducts themselves as an adversary rather than a professional doing a job, the seller experiences all of it as coming from you. So the instruction to the whole team, set early and clearly, is that the process stays objective and non-confrontational. They can be rigorous. Rigorous is what you are paying them for. But rigorous and hostile are not the same thing, and the seller can tell the difference, and it is the buyer who pays for the hostility in lost goodwill and sometimes a lost deal.

The third place materiality applies is the one that follows directly from the last piece, which is what happens when diligence turns up something real. Sometimes it does. You find a customer concentration worse than the marketing suggested, a piece of deferred maintenance that is going to cost real money, an add-back that does not survive scrutiny, and the number you agreed to in the LOI no longer reflects what the business is actually worth. That is a legitimate reason to reopen price, and a buyer should not pretend otherwise or eat a real problem to avoid a hard conversation. But it has to be genuinely material, either an item that alone clears the threshold you set at the start, or a basket of smaller items that together add up to something that clears it. What destroys a seller’s trust is the buyer who re-trades on every small finding, who treats each minor issue as a fresh reason to chip at the price, who turns diligence into a running tally of deductions. That buyer confirms every suspicion the seller had, and even when the individual points are fair, the pattern reads as a buyer looking for reasons to pay less rather than a buyer who found a real problem. The materiality threshold is what lets you tell the difference yourself, and it is what lets you raise a genuine issue in a way the seller can hear, because you are not the buyer who complains about everything, you are the buyer who has been reasonable throughout and is now flagging the one thing that actually matters.

What ties all three together is that a disciplined diligence process is not only easier on the deal, it is itself a signal to the seller. A buyer who presses hard where it matters and lets the small things go is a buyer the seller can picture handing the company to. The buyer’s conduct in diligence is a preview of what kind of owner they will be, what kind of partner, what kind of steward of the relationships the seller spent decades building. The thorough, disciplined, non-adversarial buyer is telling the seller something reassuring about all of that without having to say a word about it. The buyer who treats diligence as a hunt is telling the seller something too, and it is usually the thing that makes a seller decide they would rather sell to someone else.

A note for the CPAs who refer clients to me

When your client is the buyer, you may well be one of the diligence team members this piece is describing, and the point about objectivity is one you already understand better than most, because your professional training is built on it. The value you add reviewing a target’s numbers is enormous, and it is at its highest when it is delivered as rigorous, dispassionate analysis rather than as advocacy. A buyer is well served by an accountant who finds every real issue in the financials and presents it straight, and less well served by one who, meaning to protect the client, comes across to the seller as hostile. When you and I are both working a buyer’s deal, part of what we are doing together is making sure the client gets the full benefit of hard-nosed financial diligence without paying for it in a damaged relationship with the person they are trying to buy from.

A note for the wealth advisors

The materiality discipline in this piece has a direct parallel in how you counsel a client through any large financial decision, which is knowing which risks are worth acting on and which are noise. A client buying a business is going to encounter a lot of findings in diligence, and an anxious buyer can talk themselves out of a sound acquisition over issues that do not actually threaten the investment, just as easily as an overeager one can wave past a problem that does. Being close to a client during this phase, alongside the deal team, lets you help them keep perspective, distinguish a real risk to the capital they are deploying from a minor one, and make the final commitment with the same clear-eyed judgment you would want them to bring to any major move in their financial plan.