Before presenting the Letter of Intent, buyers will take their first look under the hood. Based on the information provided in the Confidential Information Memorandum, they'll attempt to answer the crucial question: “Is pursuing this opportunity worth my time and money?"

After the initial excitement of potentially finding an excellent company to buy, buyers will actively look for reasons to walk away - red flags that might hint at potential issues down the road.

Here’s exactly what buyers typically evaluate during preliminary due diligence, and how sellers can best prepare:

1. Why is the Owner Selling?

One of the first questions buyers will ask is why you're selling. Are you looking to retire, pursue another opportunity, or is there something fundamentally wrong with the business? Buyers want confidence that you're committed and won't back out midway, costing them time and money. Be transparent about your reasons to build trust early.

2. Do the Numbers Make Sense?

Financial statements need to be clear, realistic, and aligned with industry standards. Buyers will question margins or revenues that appear unusually high or low. Prepare straightforward financial documents and be ready to explain anything that deviates from the norm. Clarity reduces buyer skepticism and helps move the process forward smoothly.

3. Is There Growth Potential?

Buyers are looking for ways they can improve and grow the business after acquisition. Highlight concrete opportunities, such as expanding into new markets, improving products or services, or leveraging untapped customer segments. Demonstrating clear paths to growth makes your business more attractive.

4. How Dependent is the Business on the Owner?

Buyers worry about what happens when the owner leaves. If the business relies heavily on your daily involvement, it raises concerns about future stability. Show that your company operates effectively without constant oversight by establishing strong management structures and clear, documented processes.

5. Are Current Results Sustainable?

Buyers need confidence that current results aren't just temporary. Demonstrate long-term sustainability through consistent historical performance, stable client relationships, recurring revenue streams, or long-term contracts. This provides reassurance that the business can maintain and ideally improve its success over time.

6. Is Anything Hidden?

Transparency is critical. Buyers worry about undisclosed issues like legal troubles, regulatory problems, or significant customer risks. Address any potential concerns upfront, providing clear explanations. Buyers appreciate honesty and transparency, and it greatly reduces the chance of a deal falling apart later.

7. Is the Business Run

Efficiently?

Efficiency indicates good management and reduces perceived risk. Buyers will look at your operations closely, evaluating your processes, systems, and overhead costs. A well-organized, efficiently run business gives buyers greater confidence in their investment.

Bottom Line

In preliminary due diligence, buyers actively search for reasons not to proceed. Sellers who anticipate concerns, communicate transparently, and clearly demonstrate the value and stability of their business are much more likely to successfully navigate this stage and move towards a completed transaction.