Khaled Azar 
Between signing a letter of intent and wiring the final payment, there is a window where deals go to die. That window is due diligence. According to iDeals, the average M&A deal took 255 days from start to close in 2024. The due diligence phase alone accounts for 60 to 90 of those days. In our experience advising tech company exits, roughly one in three signed LOIs never make it to closing. The reason is almost always something that surfaces during DD.
Most sellers think due diligence is about handing over documents. It is not. It is a stress test of your entire business, run by people whose job is to find problems. The companies that survive this process are the ones that prepared for it months before a buyer ever showed up.
What Buyers Actually Investigate
It goes far beyond financial statements.
Buyers run due diligence across five core areas. Financial DD gets the most attention, but it is rarely what kills deals. The real landmines sit in the areas founders overlook.
- Financial DD — Revenue quality, EBITDA normalization, working capital analysis. Most PE buyers now commission a Quality of Earnings (QoE) report as standard practice.
- Legal DD — Contracts, IP ownership, employment agreements, pending litigation. The Legal Due Diligence Audit Kit covers the full checklist.
- Technology DD — Code quality, tech debt, infrastructure scalability, security posture. For SaaS companies, this is where buyers spend the most time after financials.
- Customer DD — Concentration risk, churn patterns, contract terms, NRR trends. If one client represents more than 15% of revenue, expect hard questions.
- Operational DD — Key person dependency, documented SOPs, team retention risk. Buyers want to know the business runs without you.
The typical due diligence period for lower middle market tech deals. Larger or more complex transactions can stretch to 120 days or more.
Financial statements are table stakes. Buyers dig deepest into customer concentration, IP ownership, and key person risk. Prepare all five areas before going to market.
The Deal That Died Over a Contractor Agreement
A $4.2M SaaS exit unraveled in week six of due diligence.
We were advising a B2B SaaS company doing $1.8M ARR with clean growth metrics. The buyer was a strategic acquirer. LOI was signed at 2.3x revenue. Everything looked solid through the first month of DD.
Then legal due diligence flagged a problem. The company’s core platform had been partially built by a contractor in 2019. The contractor agreement did not include an IP assignment clause. Five years of product development sat on a legal foundation that did not clearly belong to the company.
The buyer’s counsel flagged it as a material risk. We brought in an IP attorney to draft a retroactive assignment, but the original contractor had moved overseas and was unresponsive. After three weeks of back-and-forth, the buyer walked. Not because the product was bad. Not because the financials were weak. Because a $2,000 contract drafted years earlier was missing one paragraph.
IP ownership gaps are the single most common legal deal-killer in tech M&A. Audit every contractor and employee agreement for proper IP assignment before you go to market.
How to Prepare: The 90-Day DD Readiness Plan
Start this work before you even have a buyer.
The best sellers treat due diligence prep like an internal audit. You want to find every issue before the buyer does. Here is the framework we walk clients through at Livmo.
| Timeframe | Focus Area | Key Actions |
|---|---|---|
| Day 1-30 | Financial cleanup | Commission a sell-side QoE, normalize EBITDA add-backs, reconcile working capital |
| Day 31-60 | Legal and IP audit | Review all contracts, confirm IP assignments, resolve any pending disputes |
| Day 61-90 | Operational documentation | Document SOPs, reduce owner dependency, organize data room |
A sell-side QoE typically costs between $30,000 and $80,000 for lower middle market companies. It sounds expensive. But every dollar spent here comes back in deal certainty. Buyers trust seller-commissioned QoE reports because they signal you have nothing to hide.
The QoE Report: Why Sellers Should Go First
The single best investment you can make before going to market.
A Quality of Earnings report is a deep financial analysis performed by a third-party accounting firm. It goes beyond GAAP. It examines revenue quality, customer cohort behavior, expense normalization, and working capital requirements.
Most sellers wait for the buyer to commission one. That is a mistake. When the buyer’s accountants find an issue, it becomes leverage. When your accountants find the same issue first, it becomes a footnote you already addressed.
I have seen sell-side QoE reports save deals that would have otherwise collapsed. In one engagement, our client’s QoE revealed that 22% of reported recurring revenue was actually project-based work billed on annual contracts. We reclassified it before going to market. The buyer’s DD confirmed our numbers matched. No renegotiation. No trust gap. Clean close at the original LOI price.
Due diligence findings are the leading cause. A sell-side QoE report dramatically reduces the risk of surprises that kill your deal.
Commission your own QoE before going to market. Finding issues first puts you in control of the narrative instead of the defense.
Five DD Red Flags That Make Buyers Walk
These are the patterns we see over and over.
After advising on dozens of tech exits, certain patterns repeat. These are the five issues that most frequently cause buyers to renegotiate or terminate:
- Customer concentration above 25%. If your largest client generates more than a quarter of revenue, most buyers either walk or demand an earn-out tied to retention.
- Unclear IP ownership. Missing contractor assignments, open-source license violations, or disputed patents. Any ambiguity here is a deal-stopper.
- Revenue quality issues. One-time revenue booked as recurring. Channel revenue with uncertain renewal rates. Prepaid annual contracts counted at full value with high early-termination rates.
- Key person dependency. If the founder is the primary sales relationship, the primary technical architect, or both, the buyer sees concentrated risk. Build the team before you build the pitch deck.
- Undisclosed liabilities. Pending lawsuits, tax disputes, unresolved employee claims. Anything material that was not in the CIM erodes trust instantly.
Buyers expect imperfections. They do not expect surprises. Disclose known issues upfront and show how you are addressing them.
Frequently Asked Questions
How long does due diligence take for a tech company sale?
Most tech company due diligence processes take 60 to 90 days. SaaS companies with clean financials and organized data rooms often close faster. Complex deals with multiple product lines, international operations, or regulatory considerations can take 120 days or longer.
What is a Quality of Earnings report and do I need one?
A Quality of Earnings (QoE) report is a third-party financial analysis that goes beyond standard audits to assess revenue sustainability, expense normalization, and working capital. For lower middle market tech exits, a sell-side QoE typically costs $30,000 to $80,000 and significantly reduces the risk of deal-killing surprises during buyer DD.
What are the most common reasons deals fail during due diligence?
The top deal-killers we see are customer concentration above 25%, unclear IP ownership, revenue quality discrepancies between reported and actual recurring revenue, key person dependency on the founder, and undisclosed material liabilities. Most of these are preventable with 90 days of preparation.
Should I hire an M&A advisor before due diligence starts?
Yes. An experienced M&A advisor helps you prepare for DD months before a buyer appears, manages the data room, coordinates responses to buyer requests, and protects your leverage when issues surface. The cost of advisory is small relative to the value preserved by avoiding a repriced deal.
How do I set up a data room for due diligence?
Start with financial statements (3 years minimum), tax returns, customer contracts, employee agreements, IP documentation, and corporate governance records. Use a virtual data room platform with activity tracking. Organize by category matching the five DD areas: financial, legal, technology, customer, and operational. Having everything ready before the LOI accelerates the process significantly.
Next Steps
The best time to prepare for due diligence is before you need to.
We will assess your financials, flag potential DD issues, and build a readiness plan so nothing surprises you or your buyer. Get a clear picture of where you stand before going to market.