Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / How Acquirers Weaponize Due Diligence
Transcript
- Lucas: Most founders think due diligence is a rubber stamp. They spend months building the relationship, signing the letter of intent, and then they assume the buyer is just checking boxes before wiring the money. But in today’s environment, that assumption is dangerous. Luna: Right, because the buyer has every incentive to find a reason to lower the price or walk away entirely if the numbers don’t hold up under pressure. Lucas: Exactly. I looked at a transaction last week involving a mid-market software company with about eighty million dollars in revenue. The seller believed their growth trajectory was bulletproof based on year-over-year metrics. But the buyer’s operational due diligence team dug into the cohort analysis of the most recent quarter. Luna: And what did they find that the high-level metrics were hiding? Lucas: They found that while gross revenue was growing, net revenue retention had dropped significantly among customers acquired in the previous fiscal year. The seller was burning cash on sales commissions to acquire low-quality leads that churned within eighteen months. It wasn’t a growth story; it was a leakage problem. Luna: So the buyer used that finding to renegotiate the valuation multiple rather than just killing the deal outright? Lucas: They didn’t kill the deal. They used it as leverage. The initial asking price was based on a premium multiple for hyper-growth tech. Once the churn data was verified, the buyer argued the company should be valued closer to a mature SaaS firm with stable, albeit slower, growth. They trimmed the purchase price by twelve percent. Luna: That is a massive difference when you are talking about an eighty million dollar top line. How do sellers protect themselves against that kind of surgical precision from the other side? Lucas: The best sellers pre-empt the audit. They don’t wait for the buyer to ask for the granular data. I’ve seen cases where sellers hire independent consultants to review their own books before even going to market. They identify the weak links in their financial model and fix them or explain them proactively. Luna: It sounds like the data room isn’t just a repository anymore. It’s a strategic weapon for both sides. Lucas: Precisely. If your data room is messy, the buyer assumes there is something to hide. If it is pristine and well-indexed, it signals confidence. But more importantly, it forces the buyer to focus on the big picture integration rather than getting bogged down in minutiae. Luna: Do you think this level of scrutiny is new, or is it just becoming standard across all deal sizes? Lucas: It’s becoming standard. In twenty twenty six, interest rates have stabilized enough that private equity firms are deploying capital aggressively again, but they are more disciplined than they were in twenty twenty one. They cannot afford to overpay for a bubble economy. Every percentage point of margin matters now. Luna: So the bar for proof is higher. Sellers can’t just show a nice slide deck of projected growth anymore. Lucas: Correct. They need historical consistency. And they need to be ready to defend their assumptions. When I speak to operators, the biggest mistake is thinking that due diligence is adversarial. It doesn’t have to be. Luna: But it feels adversarial when you realize they are looking for reasons to pay you less. Lucas: It feels that way, but the smartest negotiations treat it as a joint verification process. If you know your numbers better than anyone else, you control the narrative. If you let them dig through your spreadsheets for three weeks without context, you lose control. Luna: That makes sense. Context is everything. A missing invoice is a red flag; a documented explanation for a timing difference is just accounting. Lucas: Exactly. This brings us to a practical question for our listeners who might be preparing to sell. How much detail is too much detail? Do you dump everything into the data room or do you curate it tightly? Luna: I would lean toward dumping everything. Transparency builds trust. If you leave things out, they will find it eventually and assume the worst. Lucas: I agree, but curation is still key. You want to make it easy for the buyer to find the good news quickly. Structure your folders logically. Label your files clearly. Don’t make them hunt for the evidence that supports your valuation. Luna: It’s about reducing friction. The smoother the due diligence process goes, the faster the deal closes. Speed is money in these environments. Lucas: Absolutely. Time dilates value. The longer a deal sits in limbo, the more likely it is to fall apart due to market shifts or internal politics at the acquirer. So efficiency is a form of protection. Luna: Speaking of protecting the deal, we need to take a quick pause here to talk about how we keep this conversation going for you. Lucas: If these discussions about deal structure and negotiation leverage have helped you see your own business in a sharper light, consider supporting the network directly. Listener contributions allow us to maintain ad-free episodes and continue deep dives into complex transactions. Luna: You can find us at buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Your support keeps the lights on and the research rigorous. Lucas: Thanks for keeping this space running. Now, back to the mechanics of the sale. Luna: Let’s talk about the specific moment when the bad news comes out during diligence. What happens when the buyer finds a liability you didn’t expect? Lucas: This is the critical juncture. Panic sets in. The seller wants to hide it or minimize it. But the only sustainable move is immediate disclosure with a proposed solution. Say you discover a pending lawsuit or a regulatory compliance issue. Bring it to the table immediately. Luna: Because if they find it later, they will assume you knew and lied. That kills trust instantly. Lucas: Right. And once you disclose it, you frame it. You provide legal opinions, reserve calculations, or mitigation plans. You turn a potential deal-breaker into a manageable risk factor. It shows maturity. Luna: It also gives the buyer a chance to adjust the price fairly rather than walking away in disgust. Is that how the eighties million dollar deal you mentioned earlier handled a similar situation? Lucas: It did. The seller had a contract dispute with a major vendor that could have cost them five million dollars in penalties. Instead of burying it, their legal counsel flagged it in week two of diligence. They provided the court documents and a settlement estimate. Luna: And the buyer accepted the risk into the deal structure? Lucas: They accepted it. They actually incorporated the potential penalty into the working capital normalization. It became a line item in the final purchase agreement rather than a surprise at closing. Everyone slept better knowing the exposure was quantified. Luna: That is a much healthier outcome than fighting over whether it was disclosed in time. It turns a conflict into a calculation. Lucas: Yes. And it preserves the relationship. Even after the deal closes, the buyer needs the seller’s help during transition. If you burned bridges during diligence, integration becomes a nightmare. Luna: So diligence is really a test of partnership potential, not just financial accuracy. Lucas: Spot on. Buyers are looking for operators who can handle stress and communicate clearly. If you crumble under scrutiny, they worry about post-close stability. If you stand firm and transparent, they feel confident moving forward. Luna: It reminds me of the idea that culture eats strategy for breakfast. Maybe diligence eats valuation for lunch. Lucas: I like that framing. Because if the cultural fit is wrong, the valuation details become irrelevant. But if the cultural fit is strong, you can work through the messy numbers together. Luna: So for our listeners preparing for a sale, the takeaway is to treat due diligence as the first chapter of the merger, not the gatekeeper to it. Lucas: Exactly. Start building that bridge early. Organize your data, know your risks, and communicate openly. It protects your bottom line and ensures a smoother handover. Luna: A smoother handover means the business continues to thrive after the check clears, which is ultimately what everyone wants. Lucas: True. And that success reflects well on both parties. It’s not a zero-sum game where one side wins and the other loses. It’s a long-term alignment. Luna: Does that mean sellers should invite the buyer into the process earlier, maybe even before the formal data room opens? Lucas: Some sophisticated buyers do request preliminary audits during the LOI stage. It’s a sign of serious intent. If you are open to that, it filters out tire-kickers and accelerates the timeline. Luna: That requires a lot of confidence in your own housekeeping. Not every founder is ready for that level of exposure. Lucas: No, it doesn’t. That’s why having advisors is crucial. A good M&A advisor knows exactly when to invite that scrutiny and when to push back. They manage the flow of information to protect you. Luna: So the advisor is the buffer between your vulnerability and their aggression. Lucas: Exactly. They translate your concerns into professional language and ensure the buyer respects your boundaries. Without that buffer, emotions run high and decisions get made in anger. Luna: Which is the fastest way to lose millions on a deal. Emotion is expensive. Lucas: It is. And in a volatile market like October twenty twenty six, preserving emotional capital is just as important as preserving financial capital. Luna: So we end with the idea that due diligence is not a trap, but a training ground for the merged entity. Lucas: I think so. It forces clarity. It exposes weaknesses. And if handled well, it builds the foundation for a stronger combined organization. Luna: A stronger organization built on truth rather than hope. That seems like a worthy goal for any operator facing a sale. Lucas: It does. And it starts with the decision to stop hiding and start showing.