What diligence asks for, and why it takes so long

Companies going through diligence for the first time usually expect it to be an examination of whether anything is wrong. It is closer to an inventory: a buyer, investor or lender is establishing what the company owns, what it owes, what it has promised, and whether anything about the first three is uncertain.

That framing explains the most common source of delay. Transactions are rarely slowed by discovered problems. They are slowed by records that exist somewhere but have never been assembled in one place, and by questions that require reconstruction rather than retrieval.

What gets requested

Request lists vary with the deal, but the categories are consistent:

• Corporate records — formation documents, amendments, bylaws or operating agreements, and board and member consents for significant decisions.
• Equity — the cap table, every issuance, option grants and exercises, convertible instruments, and the documents supporting each.
• Material contracts — customer, supplier, partner and lease agreements, with attention to assignment, change-of-control and exclusivity terms.
• Employment — offer letters, agreements, contractor arrangements, handbooks, and classification decisions.
• Intellectual property — ownership and assignment records, including from contractors and former employees.
• Litigation and claims — pending, threatened or recently resolved matters.
• Financial and tax — statements, filings, and any outstanding obligations.

Where records go missing

A few gaps recur often enough to anticipate.

Board and member consents

Significant corporate actions generally require documented approval. Growing companies make decisions in conversation, act on them, and never paper the approval. Reconstructing consents afterward is possible but takes time and involves people who may no longer be available.

Equity documentation

The cap table is a summary; diligence asks for the documents behind it. Every issuance should have a corresponding instrument, an approval, and consistent terms. Discrepancies between a spreadsheet and the underlying records take time to resolve and can raise questions about the entire equity record.

Intellectual property assignments

Work performed by a contractor is not automatically owned by the company that paid for it. Where assignment language was not included in the engagement, ownership may need to be confirmed retroactively — with a person who no longer has any relationship with the company, and who now has an obvious reason to negotiate.

Change-of-control provisions

Contracts that require consent on a change of control give counterparties a say in a transaction. Identifying them early allows the parties to plan. Identifying them late gives a counterparty leverage at the point of maximum pressure.

Preparing before there is a transaction

Diligence readiness is not complicated; it is simply work that has to happen sometime, and it is much cheaper when it is not on a deal timeline.

1. Keep a single organised repository of corporate, equity and contract records rather than several partial ones.
2. Document board and member approvals contemporaneously, while the reasoning is still recoverable.
3. Reconcile the cap table against the underlying documents at least annually.
4. Confirm that every contractor and employee agreement includes appropriate assignment language, and address the ones that do not.
5. Maintain a schedule of material contracts noting term, renewal, assignment and change-of-control provisions.

The cost of unpreparedness

Disorganised records do more than slow a process. They shape how a counterparty perceives the company. A buyer encountering gaps in the corporate record reasonably wonders what else has not been documented — and that perception tends to translate into broader representations, larger escrows, or price adjustments.

None of it is difficult work. It is simply work that is far easier to do quarterly, in ordinary conditions, than in the four weeks after a term sheet arrives.