Private Company M&A – Pre-Go-To-Market Seller Self-Diligence & Corporate Clean-Up
Date: August 12, 2025
In a prior article, we covered one of the two forms of reverse diligence in private company M&A – specifically, the diligence that a Seller should conduct to vet a bidder before committing to a deal in an LOI or otherwise. This form of reverse diligence consists of the Seller receiving answers to the right questions to ensure that their goals align with the bidder’s priorities and so the Seller can assess the bidder’s financial strength, deal-closing ability and overall suitability as a Buyer. This article focuses on the other form of reverse diligence – specifically, the diligence self-assessment a Seller should conduct prior to “going to market” (GTM) in order to flag a Buyer’s likely diligence hot spots and address the same in advance.
Effective pre-GTM self-diligence and corporate clean-up put a Seller more in control of the overall M&A process and can help transform a passive exercise into a strategically proactive one. By anticipating and addressing potential issues up front, the Seller better shapes the overall narrative, makes the business more attractive to bidders, strengthens negotiation leverage, reduces deal friction and costs, and significantly increases the likelihood of a successful, early and high-value exit. It also facilitates a smooth post-Closing transition and future success of the business, which is crucial for Sellers rolling equity, receiving earn-outs, providing seller financing, or agreeing to any deferred purchase price payments.
Pre-GTM self-assessment includes many pure business topics, such as customer concentration, market competitiveness and positioning, executive management team and complex integration issues. Below is a bulleted outline of legal and other self-diligence and corporate clean-up items that a Company should address before reaching out to potential bidders in any M&A sales process.
Corporate Formation, Organization & Legal Structure
- Review and update corporate formation and organizational documents (e.g., charter, bylaws, operating agreements)
- Confirm the Company’s foreign qualifications and good standing status in all relevant jurisdictions of operation
- Confirm that all needed resolutions, consents and actions of both the Board of Directors (or other governing body) and stockholders (or other owners) are properly taken and documented
- Resolve any outstanding shareholder or Board disputes
Equity & Capitalization
- Review, update and harmonize a fully-diluted capitalization table, including all equity grants, options, warrants, and all convertible or exchangeable securities, such as convertible promissory notes and SAFEs
- Confirm the existence of accurate and up-to-date stock, membership interest, option and other ledgers
- Review and document all outstanding stock option plans, equity awards and related agreements; update as needed
- Address any discrepancies or missing documentation related to any equity ownership or other “stake” in the Company
Financial Records, Readiness & Quality of Earnings
- Prepare and review financial statements for the past 3-5 years
- Consider conducting a quality of earnings (QoE) analysis (internal or by a third party)
- Ensure clear revenue recognition policies are applied consistently
- Analyze and prepare forecasts and budgets, with supportable assumptions
- Eliminate or document non-recurring or owner-related expenses
- Reconcile and verify working capital calculations and normalizations
- Reconcile intercompany accounts and related party transactions
- Identify and address any off-balance sheet liabilities
Tax Matters
- Confirm the Company’s historical and current tax status (i.e., disregarded entity, S or C corporation, partnership, etc.), including any associated elections
- Review all historical tax filings to ensure all income, sales, payroll and other tax filings are current and compliant (federal, state, local, international)
- Resolve any outstanding tax liabilities, investigations or audits
- Assess and document net operating losses (NOLs) or other tax attributes
- Confirm sales tax nexus compliance in all jurisdictions
- Review and prepare documentation on transfer pricing policies (if applicable)
- Ensure employee-related tax reporting is accurate and up to date
HR, Employment & Benefits Matters
- Inventory and review all employment agreements, offer letters and independent contractor agreements
- Prepare an org chart and employee census with title, start date, work status, comp, benefits, etc.
- Inventory and review all equity compensation, incentive compensation, bonus, commission and other similar plans
- Confirm general compliance with employment law, including:
- Wage and hour laws (i.e., exempt vs non-exempt status)
- Classification issues (employee vs. contractor status)
- Workplace Safety/OSHA
- Immigration (I-9 and E-Verify)
- Affordable Care Act (ACA)
- Any union relations or Collective Bargaining Agreements (CBAs)
- Review and update the employee handbook and all HR policies
- Ensure all employee benefit plans are documented, available and compliant
- Assess applicability of layoff/plant closing obligations under federal WARN Act and state Mini-WARN Acts
- Review historical employment claims and any outstanding or pending employment disputes or claims
Intellectual Property (IP)
- Inventory all IP (patents, trademarks, copyrights and trade secrets) used in the conduct of the business, including both owned and licensed IP
- Confirm ownership and proper titling of all owned IP
- Includes appropriate assignment documents
- Confirm steps taken to register, perfect and expand rights in all owned IP
- Confirm executed licenses in place for all IP used that is not owned
- Confirm ownership and proper titling of all owned IP
- Ensure signed employee and contractor “work for hire” and IP assignments are in hand
- Address any IP infringement issues or disputes, both as an accused or an aggrieved party
- Review open-source software usage and practices, including verifying ownership, understanding license obligations, and assessing security vulnerabilities
- Protect proprietary tech and source code repositories
- Register key domain names
Real Estate & Tangible Assets
- Inventory and document all real estate and major physical assets or equipment, both owned and leased
- Compile all real estate ownership documents, such as deeds, covenants, etc.
- Organize all real property, equipment and other leases, subleases and contracts
- Confirm all lease agreements reflect actual terms in use, are current and in compliance
- Identify any change of control or anti-assignment provisions in leases
- Identify all liens or encumbrances
Material Contracts
- Compile and review all material contracts (e.g., customer, supplier, finance, licensing, etc.)
- Ensure all contracts are fully executed and complete (no missing exhibits or other attachments)
- Confirm that the contracts’ terms, rights and responsibilities align with actual business practices
- Develop a list of the “top 20” customers and suppliers
- Inventory and review copies of all changes in control, retention, bonus, phantom stock, severance or other service provider agreements implicated by a Company sale
- Review all contracts for provisions that may be triggered or implicated by a sale, including:
- Anti-assignment clauses
- Termination clauses
- Change-of-control provisions
- IP ownership or licensing clauses
- Exclusive dealing or most-favored-nation (MFN) clauses
- Restrictive covenants, including non-compete and non-solicits
- Indemnification and other burdensome or undesirable provisions for a buyer
- Develop a list of all contracts for which counterparty consent or notice will be required to consummate the deal
- Resolve any contract disputes or breaches
Legal Compliance & Regulatory
- Inventory all required business permits, licenses, and registrations and confirm all are current and in good standing
- Review and assess compliance with all applicable laws, including:
- Industry-specific regulations, such as defense/government contracting, healthcare, financial services, energy, telecom, food and agriculture, consumer goods, etc.
- Data privacy laws (e.g., GDPR, CCPA, HIPAA, GLBA, etc.)
- Environmental laws
- Resolve and document any past compliance issues or violations
- Maintain a log of regulatory inspections or correspondence
- Address any gaps or deficiencies
Insurance
- Inventory, review and update all insurance policies (general liability, E&O, EPL, D&O, cyber, environmental, etc.)
- Assess the adequacy of coverage and address any gaps
- Assess any change of control/Company sale notice or other provisions in all policies
- Review and document claims history
Litigation & Contingent Liabilities
- Summarize all pending or threatened litigation, claims or investigations
- Assess other potential contingent liabilities (warranties, indemnities, recalls, etc.)
Environmental and Safety
- Assess compliance with environmental, health and safety regulations
- Review all site assessments, historical records, site visits and information from past and present owners, operators and occupants to identify any recognized environmental conditions
- Address any outstanding environmental issues or liabilities
Information Technology (IT) Systems, Cybersecurity & Data Privacy
- Inventory all key IT systems, software licenses and data security protocols
- Conduct pen testing and assess the hardness of the IT perimeter and systems
- Conduct a cybersecurity audit and confirm data protection policies
- Prepare a data map providing a visual representation of the flow of all data at rest or in transit, which the Company creates, uses or touches
- Address any cybersecurity vulnerabilities or data privacy concerns with patches, new products and enhanced system configuration, policies and protocols, training, etc.
Build the Deal Team
- Engage or consult with:
- M&A advisor/investment banker
- M&A legal counsel
- Tax and accounting advisors
Assess Overall Deal Readiness
- Organize all corporate records and maintain a clean virtual data room for due diligence
- Ensure a logical folder structure for easy access by bidders
- Redact sensitive information as needed (e.g., employee-specific information, customer pricing, etc.)
- Include summaries for complex or detailed sections
- Decide on the deal team structure and internal POCs and decide when to “read in” same
- Assemble available information to assist in the preparation of the Confidential Information Memorandum, management presentations and other marketing materials for bidders
Conduct Meaningful Wealth Management, Tax & Personal Planning in Advance
This often-overlooked topic – not directly related to self-diligence – is a critical pre-GTM consideration for Sellers, and I continue to be surprised by how many business owners have successfully scaled and grown a business to the point of being on the doorstep of a life-changing and sizeable exit, but have done so very little in terms of advance personal planning. Often, they are too busy worrying about the employees, the customers and clients, the vendors, the market, the deal, etc. The reality is that estate planning, gifting, tax and other strategies exist that take time to both plan and deploy and which have to be in place long before a deal closes to work. Advanced personal planning should include careful consideration of the following:
- Trust and estate planning
- Tax minimization strategies
- Wealth management planning to include investment, diversification, hedging, philanthropy, asset protection, residency and other strategies
Sellers should remember that what matters most is not the stated Closing purchase price, but what they ultimately keep on a net-net basis after all deal costs, taxes and other charges are taken into account. Advance planning is key to maximizing this net.
Addressing these pre-GTM issues upfront will help the Company present itself in the best light, avoid surprises during Buyer’s due diligence, maximize valuation, and promote an early, smooth and rewarding Closing.
The above summary has been prepared for general informational purposes only and is not intended as legal advice. Sellers and Buyers alike are urged to consult their legal counsel concerning any particular situation and specific legal questions. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.
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