Camellia CoreWhat Due Diligence Actually Examines in a Private Firm Merger
A practical breakdown of the documents, records, and operational areas that acquirers review during due diligence — and how to prepare each one.
When an acquirer begins due diligence on your firm, they are not performing a general audit. They are looking for specific risks that could affect the price they pay, the warranties they require, or their decision to proceed at all. Understanding what they examine — and preparing those areas in advance — is the single most valuable step a private firm owner can take.
Financial records
Acquirers typically request three years of financial statements, management accounts, and tax returns. They look for consistency between reported figures and underlying records, unexplained variances, and any off-balance-sheet liabilities. For family-owned firms, personal expenses run through the business are common and must be identified and adjusted before valuation discussions begin.
Preparation tip: Engage your accountant to prepare a “quality of earnings” summary that normalises owner-related expenses. This document becomes the foundation for valuation conversations.
Contracts and commitments
Every material customer contract, supplier agreement, lease, and employment arrangement will be reviewed. Acquirers look for change-of-control clauses that allow counterparties to terminate on acquisition, contracts below market rate that cannot be renewed on the same terms, and verbal agreements that have never been documented.
Preparation tip: Create a contract register listing every agreement, its expiry date, annual value, and whether it contains a change-of-control provision. Flag any contract where the counterpart relationship is held by a single individual rather than the firm.
Intellectual property and licences
For firms where proprietary processes, trade marks, or regulatory licences are central to the business, acquirers verify ownership and transferability. Common gaps include IP developed by contractors without assignment clauses, trade marks registered in a personal name rather than the company, and licences that are non-transferable.
Key-person dependencies
Acquirers assess whether the business can operate without its current owner or key managers. If customer relationships, technical knowledge, or supplier negotiations depend on one or two individuals, the acquirer will factor retention risk into their offer — or require earn-out provisions tied to those individuals remaining.
Preparation tip: Document the processes that key people perform informally. Cross-train at least one other staff member on each critical function. This does not mean replacing yourself before a transaction — it demonstrates that the business has depth beyond its founder.
Regulatory and compliance
Depending on your industry, acquirers may review environmental compliance, workplace health and safety records, industry-specific licences, and any pending regulatory actions. Outstanding compliance issues discovered during due diligence often become price adjustments or deal conditions.
The cost of being unprepared
In our experience, firms that begin due diligence preparation after receiving an approach spend two to three times longer in the review process and accept more onerous warranty terms than firms that prepared in advance. The Merger Readiness Review exists precisely because this preparation gap is so common — and so costly.
If you are considering a transaction within the next twelve months, the time to organise these areas is now, not after an approach arrives.