Big Story

How Sellers Can Control Diligence Without Slowing the Deal

Key Takeaways

• Buyers eventually need access to customers, employees, vendors, and operations to confirm that the business can perform after the owner leaves. The important question is when that access is granted and how it is controlled.

• Sellers who restrict diligence too aggressively can create distrust. Sellers who disclose sensitive information too early can unnecessarily expose customers, employees, pricing, and other confidential information. A staged process protects both sides.

• The information sellers are most hesitant to disclose is often manageable when introduced with the right context.

Every founder who has been through a business sale remembers when the diligence requests started arriving.

The first list is manageable. Three years of tax returns. Financial statements. A customer list without contact information. Copies of major contracts. Then the requests become more specific. The buyer wants to understand the top customer relationships. They want to speak with key managers. They want to review supplier agreements. They want to walk through the facility and understand how the business operates without the founder.

At that point, diligence moves beyond financial verification and into the relationships and information that actually run the company.

This is one of the most predictable tensions in a lower-middle-market transaction. Sellers generally make one of two mistakes. Some treat every diligence request as a threat and restrict access so heavily that the buyer begins questioning what is being withheld. Others provide sensitive information too early, before a buyer has demonstrated that it has the capital, intent, and commitment to complete the acquisition. Both approaches create unnecessary risk.

Axial’s review of 75 lower-middle-market deals that broke after an LOI in 2025 found that non-financial diligence findings were the largest single cause, accounting for 25.3% of failed transactions. Another 21.3% failed because the buyer’s quality-of-earnings work found EBITDA discrepancies. 

The better approach is to understand what the buyer is trying to verify.

A buyer who has been told that customer relationships are durable needs evidence that those relationships can continue after a change in ownership. A buyer who has been told that the management team can operate independently needs to understand how those managers actually run the business. A buyer underwriting current margins needs to understand whether supplier pricing, customer contracts, or operating practices could materially change after closing.

The buyer is testing whether the business they are buying matches the business they were shown.

Customer relationships, employee capabilities, supplier dependencies, operational processes, and the founder's actual involvement in the business all determine how transferable the earnings are. Data can document the numbers. It cannot completely demonstrate how the company functions when the founder is no longer making every important decision.

Early diligence can establish the financial and operational foundation of the business while protecting information with a higher confidentiality risk. Customer names and contact details, employee compensation information, supplier pricing, proprietary processes, and competitively sensitive information can be reserved for a later stage when a buyer has demonstrated meaningful commitment to the transaction.

Not every buyer who signs an NDA and requests data is equally serious. Some may lack committed capital. Others may be exploring the market without a defined acquisition strategy. A well-run process identifies genuine buyers early and increases access as those buyers demonstrate seriousness.

The objective is not to keep buyers away from the business. It is to make sure that the right buyer receives the right information at the right stage. A seller does not need to disclose everything on day one. But everything that materially affects the business must eventually be addressed.

The strongest sellers understand that distinction before the diligence process begins. They prepare the sensitive information, establish a disclosure sequence with their advisors, and ensure that when buyers receive deeper access, they receive information that has already been organized, explained, and supported.

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Governance Feed

1. Lower-middle-market deal flow is rising, with 3,523 businesses coming to market in Q2 2026, the highest quarterly total on record and up 4.8% year-over-year. But only 11.1% of buyers say they are very willing to stretch on valuation for a high-quality asset, down from 25% in mid-2025, while 25.9% are now somewhat reluctant to pay up. Valuation expectations caused 28.3% of failed deals in 2025, and diligence findings accounted for another 24.5%, while 61.9% of dealmakers expect multiples to remain broadly flat this year.

2. Most successful business exits require 3 to 5 years of preparation, yet only 15% of owners have completed a professional valuation before listing. 53% rely on a rough estimate, and 33% do not know what their company is worth. The sale process itself typically takes another 6 to 12 months, with the current average close to 10 months. The gap matters because reducing owner dependence, improving financials, diversifying revenue, and addressing tax or succession issues often cannot be fixed once buyers are already conducting diligence.

3. A quick valuation calculator can provide a starting estimate, but buyers ultimately price a business using much more than revenue or a standard industry multiple. Cash flow, historical performance, recurring revenue, customer quality, assets, lease terms, competition, recent comparable transactions, and strategic fit can all change what a buyer is willing to pay. That is why two businesses with similar earnings can command different prices once durability and risk are taken into account. A useful valuation therefore starts with normalized earnings and market multiples, then adjusts for the characteristics that make those earnings more or less transferable to a new owner.

Thesis Principle

In a service business where the owner personally holds the key customer relationships, some of the goodwill may belong to the individual rather than the company. Under the Martin Ice Cream doctrine (T.C. Memo 1998-54), personal goodwill can potentially be sold directly by the owner to the buyer outside the corporate entity. For a C corporation, this can reduce double taxation by keeping the portion allocated to personal goodwill out of the corporation’s taxable sale proceeds.

Resources & Events

📅 Pathway to Platinum Conference (Portsmouth, NH - October 22-23, 2026)

The 16th annual Pathway to Platinum conference will take place October 22-23 in Portsmouth, New Hampshire, for CEOs, CFOs, COOs, and owners of privately held middle-market businesses. The invitation-only program focuses on the decisions that increase company value, including profitable growth, capital allocation, company culture, AI adoption, and the CFO’s expanding role in value creation. The event is aimed at owners looking to strengthen performance and position the business for a future transaction or succession. Details →

📅 Acquicon 2026 (Salt Lake City, UT - October 19-21, 2026) 

Acquicon 2026 will run October 19-21, bringing together more than 400 vetted operators, capital providers, and M&A advisors focused on acquisitions, scaling, and exits. The program includes deal labs, workshops, and sessions on valuation, integration, capital strategy, and enterprise value creation. Roughly half the audience is expected to be business owners and founders, with the remainder split between capital providers and deal advisors. Details →

📊 Report Spotlight: GP Liquidity Study (RCP Advisors)

RCP Advisors surveyed 51 North American small-buyout managers and found that roughly 80% expect at least one full portfolio-company sale over the next 12 months, while about 50% expect multiple exits. Another 54% expect distributions to increase meaningfully, and RCP’s own fund distributions through July 24 were already 156% above the same period in 2025. The report also highlights the valuation gap in private equity: companies worth $25 million to $100 million entered deals at a median of 8.8x EBITDA in 2025, compared with 13.4x for businesses worth $500 million to $1 billion. PitchBook data cited in the report show the smaller segment has generated a 39% pooled gross IRR on realized deals since 2009, supporting the case that lower entry prices and operational value creation continue to make small buyouts attractive. Read →

For the Commute

Deal Clichés Worth Questioning (DealQuest Podcast)

Corey Kupfer challenges some of the conventional wisdom that gets repeated around acquisitions and negotiations without enough scrutiny. Corey has spent more than 35 years structuring and negotiating deals, and in this episode he looks at why deal advice that sounds universally true can break down once objectives, leverage, timing, risk, and the people involved change. Kupfer’s broader point is that good dealmaking requires clarity about the outcome you actually want, rather than mechanically applying familiar rules.