What You’re Really Looking for in Diligence

How to Spot Red Flags, De-Risk the Deal, and Avoid Regret

Author

Bryan Hunsinger
August 05, 2025

In partnership with

You’ve signed the LOI.

Now it’s time to validate the deal.

Most buyers treat due diligence like a box-checking exercise.

The smart ones?

They treat it like an investigation, with a purpose:

Confirm the upside.

Uncover the downside.

And protect your downside exposure.

Let’s talk about how to do that well.

First, Know Your Goal

Diligence isn’t about proving the business is perfect.

It’s about answering 3 key questions:

  1. Is this business actually performing as presented?

  2. What risks are hidden beneath the surface?

  3. Can we mitigate those risks.. legally, operationally, or through deal structure?

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4 Pillars of Smart Due Diligence

🔍 1. Financial Diligence

What you’re validating:

  • Accuracy of revenue and expenses

  • Adjusted EBITDA or SDE

  • Customer concentration

  • Working capital trends

  • Deferred revenue and refund liabilities

Look for:

  • “Add-backs” that don’t make sense

  • Missing GAAP practices

  • Hidden costs (contractors, stock comp, personal expenses)

⚙️ 2. Operational Diligence

What you’re validating:

  • Team structure and key dependencies

  • Owner involvement

  • SOPs and documentation

  • Support, delivery, and churn patterns

Look for:

  • “Everything runs through the founder”

  • Poor onboarding or documentation

  • No second layer of leadership

🧠 3. Technical Diligence (especially for SaaS)

What you’re validating:

  • Tech stack quality

  • Codebase maturity

  • Deployment process

  • Product roadmap and maintenance burden

  • Security, uptime, and compliance

Look for:

  • Legacy spaghetti code

  • Devs who’ve disappeared

  • No source control or CI/CD process

What you’re validating:

  • IP ownership

  • Contracts and terms of service

  • Privacy policy and data handling

  • Employment classification

  • Past or pending legal disputes

Look for:

  • IP that isn’t properly assigned

  • GDPR or CCPA gaps

  • Shaky contractor agreements

Ask This on Every Risk: “Can We Structure Around It?”

You don’t have to walk away from every red flag.

Sometimes you can:

  • Adjust the price

  • Use an earnout

  • Add a holdback or escrow

  • Require transition support

  • Set KPIs for seller note payouts

Diligence isn’t about killing the deal.

It’s about buying it with your eyes open.

Trust the Seller. Verify Everything.

Founders don’t usually lie.

But they do forget, round up, or gloss over weak spots.

Diligence is your last line of defense.

Get it right, and you de-risk your future.

Miss something, and you inherit a headache you can’t return.

Don’t just close the deal. Confirm the deal.

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